There have been major changes in how investors gain access to private markets but significant hurdles remain. Here is a presentation given at this publication's recent Family Office Fintech Forum in New York City.

Here is a summary of a presentation delivered at the Family Wealth Report Family Office Investment Forum, held in April, in New York City. Mike Raso, managing partner of Conduit Private Partners, gave the presentation. The focus of the talk was on private market investing. Raso has worked in the UHNW channel (family offices and RIAs) institutional, intermediary, relationship management and consultants for alternatives and private markets. He is the co-founder of Conduit and, before this, he was a director at WP Global Partners. Before joining WP Global, Raso was a senior investment specialist for private markets and hedge funds at Aberdeen Standard Investments.

While we've seen tremendous improvements in allocator access to private markets over recent years, there are significant challenges that continue to grow beneath the surface. System fragmentation is particularly acute for family offices, multi-family offices, bank trust and RIA firms engaged in acquisitions or expanding their advisory teams. Additionally, the ongoing operational costs of maintaining your program have continued to rise.

System fragmentation
Let’s discuss a concrete example on fragmentation. Consider a growing RIA that has acquired three smaller firms in the past two years. Each acquired firm brought their own technology stack:

-- Firm A uses Addepar for reporting and has relationships with five private equity managers; 
-- Firm B operates on Black Diamond and had access to alternative investments through CAIS; and 
-- Firm C uses Tamarac and had direct relationships with several venture capital funds.

This scenario reflects the reality of our industry. According to a 2023 Cerulli Associates report, the average RIA uses more than seven different technology systems to run their practice, with larger firms often operating 10 or more disparate platforms.

The cost of fragmentation
The consequences are substantial and backed by data:

1. Operational inefficiency: A 2023 study by the Investment Adviser Association had integration issues cited as the primary pain point by 67 per cent of respondents; 

2. Scale limitations: McKinsey's 2023 wealth management report revealed that technology integration issues following M&A cost savings were typically 30 per cent lower than initially projected due to system incompatibilities; 

3. Advisor productivity impact: According to Kitces Research, financial advisors spend only 36 per cent of their time meeting with clients, with administrative tasks around technology systems consuming nearly 20 per cent of their working hours; and 

4. Growth constraints: Ernst & Young's 2024 Wealth Management Outlook found that firms with well-integrated technology systems grew AuM at an average rate 1.8x faster than those with fragmented systems.

Increased operational costs
Firms that are growing organically have similar system fragmentation issues and can be even more affected by the rise in operational costs. This is particularly significant for those advisory firms managing their own internal fund of funds and private market platform. Efficiency improvements for functions such as invoicing, capital calls, document review, data filing/integration, client onboarding and communication are clearly needed.

A standardized, out-of-the-box technology solution is unlikely to address the nuanced challenges of system fragmentation. The path forward needs to be driven by “white board discovery” that can break down the workflow processes to the step-by-step details. Only then can the process begin to develop a framework that integrates improvements while embracing embedded client constraints.

A key consideration is to find the right advisory relationship and be open to some level of operations outsourcing, so that the firm’s personnel can focus on its “core competencies.” The ideal solution will not be the same for everyone. The right approach is to implement a partner with custom specialized personnel, agentic AI and workflow improvements that are the right fit for the current scenario and can be adjusted in the future.

The misguided solution
The typical industry response has been to force standardization or the adoption of a “new solution” that will be the answer. This has led to allocators and advisory firms being overwhelmed by the abundance of choice. The post adoption issues for systems that do not connect easily can be even worse, requiring operations staff to do necessary “work around fixes.” The downstream effect can lead to turnover.

According to a 2023 Fidelity study, 71 per cent of advisors who changed firms cited "technology constraints" as a significant factor in their decision to leave. The same study found that firms allowing technology flexibility reported 42 per cent higher advisor satisfaction scores than those mandating specific platforms.

The change needed
Another proprietary system that forces firms to abandon their existing relationships and technologies is not the answer. What's needed is a global adaptor – a solution that embraces the reality of multiple systems rather than restricting who you can work with or how you go about it. This concept isn't without precedent. The success of middleware solutions in other financial sectors demonstrates the potential. Systems like Plaid and the SWIFT network have applied similar aspects.

Consider how a properly designed conduit would transform operations:

-- When a growing RIA onboards a new advisory team, instead of forcing them to abandon their technology stack, the “conduit” would integrate their existing systems while providing access to the firm's full range of alternative investments; 

-- Allow the operations team at an MFO that runs their own fund of funds to reduce their time on non-core competency functions and increased time for client interactions; and 

-- When a private equity manager wants to expand distribution, rather than building connections to dozens of different platforms, they connect once to the “conduit” and instantly reach qualified investors across multiple systems.

The path forward
While there is no universal approach to be adopted there are key elements to keep in mind:

1. Open architecture: A commitment to working with – not against – the diverse technology landscape that exists today.

2. Standardized data protocols: Creating unified frameworks for exchanging private market information while preserving security and compliance.

3. Relationship-centric design: Recognizing that in private markets, relationships matter as much as transactions.

Why it matters: A 2024 PwC digital transformation survey showed that financial services firms implementing API-first, middleware-oriented architectures achieved 3.5x greater ROI on their technology investments compared with those pursuing monolithic system replacements.

The firms that address system fragmentation and implement custom specialized personnel, agentic AI and workflow improvements for their non-core competencies will be the winners.

They will be able to scale their businesses without sacrificing quality or increasing operational complexity.