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Alts Access Integral to Financial Advisor Success in 2023

According to a recent CAIS survey, private wealth allocation to new asset classes is set to take off over next two years.

As economic uncertainty and market turbulence continue to disrupt the private wealth channel, many individual investors are looking to their advisors for fresh ideas to protect capital and pursue enhanced returns. Amid this instability, alternative investments appear to be recognized as a viable—and vital—solution.

While select advisors have been exploring alts in recent years to help drive growth during bull market cycles, the independent financial advisor community at large has historically been underallocated to alternatives relative to their institutional investor counterparts, which often allocate between 30% and 50%, according to McKinsey.

Earlier this year, CAIS’ inaugural Alternative Investment Summit convened several hundred industry professionals, including executives from over 60 leading alternative asset manager firms and hundreds of independent financial advisors from RIAs and IBDs that oversee more than $2 trillion in assets. In partnership with Mercer, CAIS surveyed nearly 200 attendees to learn firsthand about their perspectives and priorities when it comes to alts investing. 

The results were telling. Nearly nine in 10 financial advisors intend to increase their allocations to alternative asset classes over the next two years. Equally notable, just under 90% of alternative asset managers and other financial professionals in attendance said the independent wealth channel is a greater priority for their firms now than it was two years ago.

These converging trends appear to reflect industrywide efforts to strengthen the private wealth channel’s access to alts; unlocking new opportunities for independent advisors, alternative asset managers and retail clients in the process. We believe four trends are ushering in a “new era of access” to alternative investments:

  1. Advisors feel empowered to offer clients fresh solutionsAmid high inflation and tightening monetary policy, a majority of financial professionals already agree that the traditional 60/40 portfolio mix is no longer an effective investing strategy. As a result, many are shifting to a three-dimensional portfolio that more closely resembles a 50/30/20 allocation across stocks, bonds and alts.

    The impact of this growing trend is reflected in our survey results: 53% of financial advisors intend to raise their alts allocations to over 15% in the next two years. More than a fifth of these advisors project that alts allocations will exceed 25% of portfolios. In contrast, just 8% of respondents do not plan to increase their alternative asset allocations within the same time frame.
  1. Asset managers see potential massive opportunityFor decades, most alternative asset managers focused solely on institutional and ultra-high-net-worth investors. Assets under management of North American wealth managers is expected to increase to $73.3 trillion by 2025, up 26.4% from $58 trillion in 2020, per Aite Group. The process of advisors increasing client exposures to be more in line with institution-level allocations, i.e., “The Great Reallocation,” could result in up to $10 trillion shifting from stocks and bonds to alternative investments over the next few years.

    It is no surprise then, that nearly 70% of the alts managers surveyed have confirmed their plans to roll out new “limited liquid” investment products and/or structures to meet this rising demand—including interval funds, ’40 Act funds, and nontraded REITS.
  1. SEC and retirement industry acceptance of alts appears to be growingAt the regulatory level, the SEC continues to introduce steps that make alts more accessible to, and inclusive for, individual investors. The agency expanded its definition of “accredited investor,” perhaps recognizing that it had set the bar too high and excluded too many from the potential benefits of alts. The SEC’s Asset Management Advisory Committee also unanimously approved a letter stating that the regulator should consider permitting retail investors’ wider access to private investments. The SEC is also reviewing new retail alt products, including funds driven by private equity investments in corporate leveraged buyouts and growth equities, among other businesses.

    Equally notable, lawmakers recently introduced text for a proposed bill, the Retirement Savings Modernization Act. As an amendment to the current Employee Retirement Income Security Act (ERISA) law, it would clarify that fiduciaries managing defined contribution plans are permitted to invest across all asset classes, not just stocks and bonds. A number of industry groups and corporations, including the Small Business Investor Alliance and Voya Financial, have offered their support for the bill; providing support of alts potentially moving from “nice to have” into “necessary” territory across investors.
  1. Tech-driven platforms are elevating access and changing the game—What many members of the independent financial advisor community have in entrepreneurial spirit, they may lack in the deep back-office resources of their wirehouse counterparts. Accordingly, advisors participating in our survey cited high levels of administration (51%) and concerns around due diligence (42%) as some of the greatest hurdles to adopting alternatives in their portfolios.

    Just as the laws of supply and demand drive our economic system, newly developed wealthtech platforms and tools are now providing valuable operational efficiencies that independent advisors can utilize. This improved pretrade, trade and posttrade experience includes enhanced online education resources, outsourced due diligence and a spectrum of other time-saving services, like digitized subscription processing and integrated reporting with custodians.

As the alternative investment ecosystem continues to evolve, CAIS and Mercer are strengthening the connections between independent advisors, alternative asset managers, custodians and service providers so that, collectively, we can tackle the challenges that have traditionally made alts allocation a burden to independent advisors.

Advisors who proactively seek out partners and resources in these areas may be in the pole position to attract the next generation of investing-savvy clients.

Matt Brown is the CEO and founder of CAIS.

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