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Why Many Firms Are Ill-Equipped to Handle Alternative Investments

Too often, "full-service" translates to cookie-cutter, one-size-fits-all solutions. As a result, firms are shying away from alternatives.

In the coming months and years, it’s likely that alternative investments will begin to play a more prominent role in client portfolios. 

Though interest rates are on the rise, they remain relatively low. So, even as traditional fixed-income vehicles may become a bit more attractive going forward, investors will likely still crave other income-producing products in what should continue to be a low-interest rate environment.

What’s more, with the current state of the market more volatile, advisors may want to protect their clients against the prospect of a looming downturn. Uncorrelated to the equity markets, alternatives could provide portfolio diversification and help manage against that risk. 

In this landscape, clients for whom these vehicles are appropriate will need to have access to them. The problem, though, is that a growing number of firms are unable to accommodate this need, thanks to two parallel but related trends shaping the industry. 

The first trend is consolidation. As large firms continue to swallow up smaller competitors, many independent advisors today are affiliated with only a handful of mega broker-dealers. With so many advisors to serve, such firms are hampered by economies of scale, meaning that delivering a customized experience to individual advisors is disruptive, even as they make every effort to present themselves as ‘full-service,’ capable of serving every need or supporting every business model. 

In many cases, ‘full-service’ often translates into cookie-cutter, one-size-fits-all solutions, not to mention less specialization. As a result, more firms are shying away from alternatives because they require a level of expertise, nuance and sophistication that they either do not have or do not want to offer due to the associated costs.

To the extent that firms, both large and small, provide advisors alternative investment options, they are often associated with large projects, not smaller ones that often require more time and resources to vet but which can provide more value. In this scenario, end investors are the biggest losers.

The second trend is the rise of third-party advisory platforms. At first glance, it’s probably not at all clear why this trend impacts the ability of advisors to deliver alternatives to their clients, but a closer look demonstrates how.

A fee-based business model requires advisors to act as a fiduciary – meaning they not only need to have an in-depth knowledge of a client’s goals, dreams and aspirations but an awareness of their risk tolerance, investible assets and time horizon. Because no two advisory clients will have the same combination of needs and goals, each requires a different investment strategy and level of service. An over-reliance on outsourced solutions could make that process problematic.

Determining whether a client is a good fit for an alternative product—or which one can better address their specific need—requires a similar level of consideration. If a firm is unwilling to make an all-out effort to support advisors’ advisory needs—which have become central to remaining relevant in today’s environment—it’s unlikely they can develop the relationships and due diligence processes to deliver alternatives to the market capably. 

Therefore, just as alternatives could be taking on added importance as interest rates remain historically low and the markets get wobblier, there are a declining number of firms that will be able to serve what could be a very fundamental need in the years ahead. Until there is better alignment between what advisors need and the realities of the marketplace—whether it has to do with alternatives, advisory platforms or something else altogether—advisors shouldn’t expect their ‘full-service’ broker-dealer to provide them everything they need. 

This is neither good news for millions of investors across the country, nor a great progression for the industry. Thankfully, there are a select number of firms today that despite these swirling industry trends can still deliver quality alternatives to the market—even as it means working harder to help advisors meet the unique needs of their clients and uncovering solutions that may be smaller and more under the radar. 

Clive Slovin is the president and CEO of Atlanta-based SFA Partners, which provides shared services to a family of companies focused exclusively on empowering independent financial advisors.

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