Alternative investments and their role in wealth management

Alternative investments including private equity, private credit, and private real estate may help wealth managers give their clients exposure to enhanced benefit potential beyond the traditional 60/40 portfolio of equites and fixed income. Offering these options may also set the savvy wealth manager apart from the competition.

Why offer alternative investments

The range of alternative solutions accessible to wealth managers keeps growing. Lower minimum investments have opened many alternative strategies to retail investors who aren’t considered HNW. Intermittent liquidity products have become a popular starting point for wealth managers venturing into alternatives. Interval funds, for example, periodically buy back shares rather than trade on secondary markets, essentially forgoing daily liquidity for potentially higher long-term growth.

Alternative investment exposure may help diversify risk, dampen volatility, promote growth, add income, and hedge inflation. But wealth managers likely need to work to manage client expectations by understanding and explaining the features, potential advantages, and risks of these products. The necessary due diligence can lead to expertise and specialization, which can help wealth managers differentiate their services.

Clients already seeking alternative investments

Alternative investments attract increasing attention from wealth managers, particularly those serving HNW/ultra-high net worth (UHNW) investors. According to Practice Innovation Index respondents, wealth managers allocate an average of 3% of their client assets to alternatives (excluding liquid alternatives). That percentage rises to 7% for practices whose average client size is at least $10 million.¹

HNW clients tend to have a longer-term horizon with investments allocated to a wider range of non-traditional asset classes, including private equity, private credit, venture capital, hedge funds, and private placements. These investors increasingly turn to alternatives for portfolio diversification, enhanced return, and high-yield opportunities in the private credit markets. Providing access to high-quality alternative strategies and exclusive private placement opportunities can differentiate practices looking to attract the higher end of the wealth market.²

One practice added a client because of it. “We were pursuing a prospective HNW client and decided to include our alternative investment capabilities as part of our pitch at the last minute. We ended up winning the business and later learned that it was mentioning alternatives that was the deciding factor in hiring (us) as their advisor over another competitor.”³

Certain segments of the retail market lead the way in alternative adoption. Client sophistication may be one reason why. Practice Innovation Index respondents show that wealth managers in the wirehouse channel currently allocate 4.5% of assets to alternatives followed by registered investment advisors (RIAs) at 3.6% and broker/dealers (B/Ds) at 1.6%.¹

Cerulli Associates, the research and consulting firm that powers the Practice Innovation Index, expects greater adoption across retail channels amidst evolving market conditions, greater product access, and increased home-office support.²

Incorporating alternative investments

Wirehouse and B/D home offices are providing more resources and portfolio construction support to help wealth managers incorporate alternatives into client portfolios. Increased product innovation, technology, and access via third-party alternative platforms are driving adoption among RIAs. More home offices are including alternatives on their recommended list and offering implementation support for practices allocating to alternatives. Some firms are beginning to incorporate alternative investments into model portfolios, although this practice remains in the early stages. With better tools and resources, average allocations will likely trend upward in the coming years.¹

Operational hurdles and due diligence challenges remain a key barrier to alternative adoption and will require additional education for wealth managers. Sourcing and due diligence, not to mention the operational burdens that accompany these types of exposures (e.g., onboarding paperwork, K-1 tax filings, capital calls), continue to challenge practices. A recent study by Invesco, Investments & Wealth Institute (IWI), and Cerulli cited lack of liquidity (56%), educating clients (44%), and product complexity/due diligence burden (39%) as the main factors preventing greater adoption.⁴

Despite implementation and education challenges, Cerulli is encouraged to see greater support and product availability at the home-office level. It believes that alternative assets will continue to gain relevance across the broader retail segment for years to come. Incorporating alternatives lets wealth managers to enhance their value proposition, differentiate their practice, attract HNW clients, and grow their practices.²