When it comes to alternative investment opportunities, an advisor’s options vary widely depending on the channel in which they are operating. Wirehouse advisors have had, and continue to have, a well-vetted palette of alternative investments to offer high-net-worth clients, from private equity funds to direct investments in startups. Registered investment advisors, on the other hand, while having fewer restrictions on the offerings they can choose from, have historically had to overcome the twin hurdles of investment minimums and information scarcity that can hamper their ability, or willingness, to provide clients with access to these kinds of investments.
Among advisors who have used alternative investments in the past and are currently offering them to HNW clients, private equity funds and direct deals are more popular at wirehouses than RIAs, while RIAs find hedge funds more appealing than their wirehouse peers, according to a recent study by alternative fintech platform iCapital Network. In fact, 88 percent of wirehouse advisors report using PE funds compared to 71 percent of RIAs. Conversely, 67 percent of RIAs use hedge funds while 59 percent of wirehouse advisors are currently using those vehicles.
Overall, more than three-quarters of the financial professionals surveyed use some sort of private placement investment, 61 percent use hedge funds and just under 15 percent use direct deals in their alt strategies. Wirehouse advisors also tend to allocate a higher percentage of assets to alts than RIAs. Meanwhile, the private capital market continues to grow, tripling since 2006 and valued at $4.6 trillion, reports The Wall Street Journal.
But the trend to alts is not for all advisors. “It’s hard to go back to the client and say there’s no end in sight,” said Clint Walkner, co-founder and advisor at Madison, Wis.-based Walkner Condon Financial Advisors. While advising HNW clients, he used non-traded REITs in 2010 as the asset class reached recession-induced lows.
At first the exits were quick, Walkner noted, with some of the transactions taking around 18 months. Then the cycle started to lengthen, and transparency became an issue. He reevaluated the investments and decided it was no longer a fit for his millionaire-next-door-type clients. “I don’t know if there’s an actual need for our clients to have [alternative investments],” he explained. “They don’t need hedge funds, they need liquid investments that are diversified. Sometimes the tried and true is all you need.”
Among advisors using alternative investments, a large majority are attracted to the promise of high returns offered by products like PE funds, said Nick Veronis, co-founder of iCapital. “The characteristics of the asset class increasingly appeal to advisors who recognize the potential to promote a buy-and-hold discipline,” he added.
Other advisors utilize alts for downside protection and for clients who request them. “We do customized market-linked notes for our high net worth clients,” said Tom Balcom, founder and advisor at 1650 Wealth Management based in Lauderdale-By-The-Sea, Fla. He said the investments that address specific client needs and outlooks is more cost-effective than a hedge fund, and more accessible too.
In the future, expect to see more investments by RIAs in private equity funds and direct deals and a big slowdown in hedge fund investments, with over four in 10 RIAs saying they plan to invest less in that product, according to iCapital’s survey. Wirehouse advisors aren’t hitting the brakes quite as hard on hedge funds, but their future actions look similar.
For alternatives to truly take off, however, advisors say more education is key. “We had to go out and do our own research and educate ourselves,” said Balcom. “It’s not like you can just go read a book and understand.”
For his part, Walkner was frustrated by the lack of a central information hub for alternatives. “I wish the custodians would get more involved in offering somewhat of a marketplace to look at them,” he said. If alternative investments can provide better transparency, he said a lot more firms would be looking at them, including his own.