Advisor demand for investments they can’t find on public stock exchanges is creating new opportunities for fintech companies.
Alternative Investment Exchange (AIX), a digital marketplace for alternative investment transactions, kicked off March by announcing a partnership with independent broker-dealer Kalos Financial. AIX will provide Kalos’ advisors with a paperless, Turbotax-like “point and click” experience that reduces the time it takes to invest in alternatives from weeks down to minutes, says Brad West, COO of AIX.
Kalos declined to comment, but the deal is a win for AIX, which went public in 2019 after building the technology for years in a fintech incubation program. The company has a similar partnership with Independent Financial Partners, says CEO Joe Ujobai.
The deal also speaks to the current momentum behind alternative investing fintech as advisors struggle to help clients invest in assets that aren’t correlated to rising stock markets.
“There is real strong interest in helping advisors allocate more assets to alternatives, but there is a reputation that it’s not an easy thing to do,” Ujobai says. “Advisors don’t expect the market to be [going up] forever. They’re working to get more education on how alts fit into client portfolios.”
The coronavirus has also proven to be a catalyst for the growth of digital alts platforms. Prior to the pandemic, the alternative investing industry was reliant on in-person meetings, says Eric Noll, CEO of Context Capital Partners, a holding company that launched a technology platform, Context 365, to aid in the research and discovery process for alternative investments.
Without live events, independent advisors are struggling to find the same opportunities, and there are high acquisition costs to find, access, vet and approve an alternative investment for a client, Noll says.
Automation that eases that process is drawing interest across the wealth industry. In February,
Venture capital is allowing firms to remain private for far longer than they traditionally would, and venture-backed firms were valued at more than $2 trillion last year,
Since the Canadian company moved into the U.S. a few months ago, it’s attracted more than a dozen broker-dealers, Schaeffer says: “The quest for access to this asset class is insatiable.”
Alto IRA, which provides a network of alt providers for investors to put self-directed retirement account assets into anything from real estate and private equity to cryptocurrencies, has raised
Advisors in particular have interest in access to crypto, private equity and venture capital, and a platform like Alto IRA helps them perform due diligence for clients on investment opportunities, Satz says.
“Robo advisors have pretty significantly put the writing on the wall for the financial advisor community that if you don’t figure out how to differentiate your service offering over the next decade, you’re going to die,” he says. “Can you help them with due diligence on this particular alternative investment opportunity?”
It remains to be seen if these firms can get significant traction with advisors. Two companies, iCapital Network and CAIS, have already grown quite large by offering RIAs and independent broker-dealers access to alternative investments.
iCapital
Meanwhile, CAIS, which has its own AI-powered learning system called CAIS IQ,
Executives from both companies say 2020 was a record year for growth as market volatility drove advisors to seek diversification away from equity markets.
Given the opportunity in helping independent advisors more easily access alts, it’s only natural for more players to enter the space, says iCapital CEO Lawrence Calcano. And with fintechs taking different approaches to the market, there is room for larger firms like iCapital to partner with a startup rather than compete directly, Calcano adds.
Of course, there could also be acquisition opportunities. In May,
“What are they trying to build? There are real differences between what [new entrants] are trying to offer,” Calcano says. “iCapital has spent our time building a robust technology platform [that’s] configured differently in terms of assets and value and service that we provide to our customers.”
Brown is encouraged by new technology innovation in the alternatives space, but says wealthtech firms that have just a transaction engine will struggle. The key to success is a marketplace approach and trusted relationships with advisors, asset managers and a broad spectrum of custodians, Brown says.
AIX has built connections with 10 different custodians as well as four transfer agencies for alternative assets that are non-custodied, West says. The company sees plenty of room to grow by working with RIAs who serve a more mass affluent client base and by letting broker-dealer clients like Kalos determine which products advisors can access, as opposed to iCapital’s and CAIS’s approach of curating a list of approved investments.
The company is also confident its technology can offer advisors a better digital experience than competitors.
“When you get past the marketing and press releases, the issues in experience and friction have never really been addressed,” West says. "The industry to date has been focusing on wealth and asset managers, but there’s a lack of understanding and investment in connecting to transfer agents or custodians. We’re building that whole connectivity across all parties.”
