New technology opens up the market to those who want to distribute and buy alternative investment products. The author of this article, at a US wealth management group, talks about the evolution of the market and what the future holds.
The following guest article comes from Steven Brod, the CEO
and chief investment officer of Crystal
Capital Partners, a Registered Investment Advisor in the US.
The editors are pleased to share these views; the usual
disclaimers apply to the views of guest writers. Email email@example.com
The landscape of investment platforms has witnessed the emergence of a new player in recent years – alternative investment platforms. As financial advisors strive to attract the best clients, it is crucial for them to grasp the fundamental aspects of these platforms. While non-traditional asset-focused investment platforms have existed for some time, the technological advancements surrounding alternative investment platforms have made this type of investment more accessible to a wider range of investors.
Initially, alternative investment platforms gained traction in the early 2000s due to heightened demand from institutional investors seeking alternative investments. However, today, these platforms are increasingly popular among retail investors, including both accredited investors and qualified purchasers. The allure lies in their potential for higher risk-adjusted returns and lower correlation to traditional investments. As an alts platform provider, our firm has witnessed the creation of 80 new client portfolios in 2022 alone, representing a growth of 21.3 per cent, year-on-year.
With a multitude of alternative investment platforms available,
it is imperative for wealth managers to understand which
platforms offer suitable structures. Additionally, they should
consider key differentiators such as the platform's alternative
investment offerings, service provisions, and ownership
structure. As each platform caters to different types of clients,
wealth managers must explore their options thoroughly before
making a decision. The categorization of investments, the level
of service provided, and the ownership interests of the platforms
should all factor into their choice.
Categorization of alternatives: Product offering and investor type
With more than $13 trillion in assets in alternative investments at the end of 2021, and AuM in global alts expected to grow to $23.21 trillion by 2026 according to market research firm Preqin, wealth managers must first comprehend the various types of investments offered within the alternative investment platform ecosystem. Some platforms aim to provide a well-balanced selection of multiple alternative investment strategies, while others follow specific mandates or selection criteria, leading to diverse product scopes and profiles.
Structures available: Accredited investors vs qualified purchasers
Given the varying wealth statuses of investors, alternative investment platforms can provide access to a wide range of investment funds and structures tailored to different SEC-designated client types. It is crucial for advisors and investors to understand the specific client types each platform caters to. For instance, platforms built for qualified purchasers (QPs) exclusively offer access to underlying funds and investment structures that can legally accept only QP investors.
While all platforms strive to democratize the space by reducing investment minimums for end clients, the fund minimums required for QP-facing funds are often higher than those for accredited investor-facing funds. Consequently, QP funds are designed to serve ultra-high net worth and institutional investors exclusively. This distinction ensures that investors participating in QP investment structures meet the SEC's criteria and possess the financial sophistication necessary to make informed investment decisions.
Degrees of service: Full suite service vs
The primary service offered by all alternative investment platforms is access to alternative investments. These platforms democratize access to a variety of opportunities that may have otherwise been inaccessible. Access may include private credit, private equity, venture capital, real estate, hedge funds, and more.
Unlike traditional investment portfolios consisting of stocks and bonds, alternative investment portfolios require extensive services beyond the point of investment. While institutions such as endowments possess robust operational infrastructures capable of managing the administrative burdens and varying liquidity schedules of multiple alternative investments, most advisors struggle with this operational burden. In a survey taken by my firm, 80 per cent of respondents among our clients said investment support beyond the point of sale is of interest to them, when considering an alts platform. Although digitization has advanced significantly, certain platforms specialize in specific niches across the services spectrum, while others aim to provide comprehensive coverage. These services can range from consolidation and liquidity management to client education and business development support.
Ownership interests of alternative investment platforms:
Privately owned vs private equity/venture
Wealth managers and underlying clients must understand the ownership interests associated with the alternative investment platforms they choose to associate with. The rapid growth of the alternative investment platform ecosystem has attracted interest from asset managers worldwide seeking to capitalize on this expanding segment.
Conflicts of interest
To avoid potential pitfalls that could harm advisors and their clients, firms should align themselves with platforms that guarantee a conflict-free manager selection process. Transparency in fund selection is crucial due to the substantial influx of private capital funding into the sector. A fully-vetted platform that prioritizes product distribution based on the merits of the fund's investment strategy, rather than distribution for payment, ensures the elimination of conflicts.
Alignment of interest
To foster a direct alignment of interest among the fund manager, platform, and end investor, advisors should seek platforms that invest in the products they distribute. Similarly, platforms should distribute products in which the manager has made significant internal capital commitments. Wealth managers should also consider platforms where the platform capital is contributed to the funds on the roster.
The alternative investments industry has been, is, and will continue to evolve to meet the growing appetites and needs of clients. While a plethora of solutions are available, advisors must comprehend the nuances associated with each platform to ensure that their clients' needs are adequately met. Advisors venturing into alternative investments must recognize that these non-traditional investments represent a long-term journey, requiring infrastructure beyond the point of sale to ensure efficient outcomes. Ultimately, the quintessential factors are the alignment of interests and platform transparency.
About the firm
Crystal’s selection of funds is used by 200 advisory firms representing 450 client portfolios. Based in Miami, Florida, Crystal Capital Partners' clients include independent advisors, regional banks, IBDs, and multi-family offices. Crystal is a Registered Investment Advisor.