The Boston-headquartered research and analytics firm looks at how advisors try to gain entry into alternative asset classes such as private equity, and examines their use of structured notes.

Alternative investments such as private equity and real estate remain popular wealth management areas but advisors claim that the lack of liquidity is a big challenge for getting access, a report from Cerulli Associates says. But the area should gain ground in the search for returns, it says.

The complexity of alternative investment products is also a turnoff for this area among advisors, the report from the research and analytics firm says. 

Despite an elevated rate environment, just under one-third (30 per cent) of advisors who reported allocating or planning to allocate to alternative investments either currently use or plan to start using structured notes in their practice, according to the The Cerulli Edge – US Monthly Product Trends report. 

(To use one standard online definition for the purpose of this article, a structured note is a “debt obligation that also contains an embedded derivative component that adjusts the security's risk-return profile. The return performance of a structured note will track both the underlying debt obligation and the derivative embedded within it.”)

The deterrent effect of low liquidity points to a basic issue that wealth advisors must confront when talking to clients – non-listed investment areas such as private equity, private credit, infrastructure and real estate earn higher returns precisely because they are less liquid than stocks and bonds. There are “liquid alternative” structures – such as listed funds holding non-public assets – but these can involve large share price discounts to net asset values. It is also important for advisors to ensure that the liquidity of funds is matched by the status of the underlying assets – often a subject that exercises regulators. 

In other findings, the Cerulli report said that a further 26 per cent of financial advisors previously have used structured notes but report that they are not using them currently.

In other figures, the Cerulli report said total mutual fund assets climbed above $18 trillion for the first time since April 2022. While overall assets increased, net flows for mutual funds were negative in July, as $34 billion in net outflows from active mutual funds overpowered $8 billion in net inflows to passive mutual funds. Net outflows for mutual funds total $205 billion in 2023.