How to get clients comfortable with alternative investments

The alternative investment platform CAIS announced the launch of a registered investment advisory division, CAIS Advisors, at its third annual summit on Oct. 15 in Beverly Hills, California. Along with advisory services, the unit will provide financial advisors with customizable model portfolios and multi-manager registered solutions. 

Those services may make it easier for financial advisors to diversify client portfolios with alternative investments. But just getting clients interested in the assets, which are often seen as a harder sell due to factors like illiquidity and risk, can be a challenge for advisors.  

Getting clients familiar enough with alts to invest in them was the topic of a CAIS Summit panel on Oct. 15 led by Marco Della Torre, CEO of Two Sigma's Venn portfolio analytics platform, and featuring Jill Jensen, managing director with Nuveen's alternative investments platform, and Brendan McCurdy, managing director and co-head of financial advisor solutions at Ares Wealth Management. 

"It starts with education," said Jensen — not just for clients but for advisors as well. In addition to publishing thought leadership content on alternatives, she said Nuveen provides "great access to our investment teams, data rooms — all the things you need to do thoughtful diligence."

READ MORE: All about alts: The cases for (and against) private investments

McCurdy agreed education is key; Ares offers an online resource library, AccessAres, to provide insights into private markets. 

"It's a website, but I'd also say it's really an ethos that pervades our firm," McCurdy said. "It's how we think about opening up what traditionally has been a little bit less transparent set of asset classes, making it much more transparent." 

Getting clients past 60-40

For the clients who are curious about alternatives, Jensen and McCurdy offered strategies on how to get them to move forward on making allocations to the investments. 

"You always want to start with the goals," Jensen said. "What are you trying to solve for; are you trying to reduce volatility, enhance return?" 

Discussing the goals can help advisors demystify for clients what alternatives can do, she said. Different investment types suit different goals — real estate for inflation hedging, or private credit for higher rate environments — and can be tailored to meet specific needs. 

"We try and start with stories," McCurdy said. "When we're first sitting down [with a client], we want to tell the story about how have debt markets changed over the last 30 years, and why are there half as many banks today?" That leads to discussion about how the consolidation of regional banks into larger institutions contributed to the rise of private credit and debt markets. 

"People are already familiar with private markets, they just maybe don't realize it," McCurdy said. "Once we get them nodding along and understanding from the story perspective, then we come in with lots of analytics." That data shows what shifts and allocations mean over time and how moving into private markets can lead to better outcomes down the road.

"When you can show someone that $100,000 invested in the early '90s in public equities would have compounded something between $1.1 million and $2.1 million… and then you show them that same $100,000 and turn it almost $7 million over that 30 years — that helps a lot, too," he said.

READ MORE: Popular in portfolios? Private markets, by the numbers

Keeping clients calm amid risk

Alternatives can be uncharted territory for many investors, Della Torre said. But advisors can help keep them rational despite under or overperformance.

Setting realistic expectations and understanding alternatives as diversifiers that are different — those differences could manifest in terms of liquidity, taxation, cash flow requirements or capital calls.

"The risks are there in any investment landscape — black swans, sanctions, geopolitical risk, that all exists," she said. "But just understanding and managing those expectations within your own team on what these strategies do can help so there are no surprises on the other side."

But there can be benefits to nervous investors, given the generally illiquid nature of private markets, said McCurdy.

"They're less likely to get out at the worst times and get in at the worst times," he said. "The fact that the investor returns in the private markets are much narrower, that's actually been really good for end investor experience overall."

READ MORE: Clients want in on private markets. Should advisors hold their hands?

Understanding that long-term nature of these investments and aligning them with clients' actual liquidity needs is essential. 

"Emotional liquidity has very strong hold with your clients, we appreciate that," Jensen said. "But for the added diversification benefit of private markets, the liquidity is matched to the underlying asset and the value that can be created by those investments over time."

How to achieve the next step: scaling

 Once a client is happy to make alternative allocations, how does an advisor translate that into scale? 

"Part of our answer is providing technology that allows advisors to focus on the real work, human to human, and taking away from the advisors all of the 'make work' to start the conversation and land the message," Della Torre said. 

"On scale, it does kind of come back to structure and eligibility of the client for the strategy — so whether it's an accredited investor or a qualified purchaser — and then whether the strategy is evergreen or semi liquid or illiquid," Jensen said. "Some firms have evolved into creating their own in-house, special-purpose vehicle pools, where they're aggregating all their clients internally and sending us one check on behalf of your advisory firm — it's another way people scale." 

McCurdy cited three strategies for scaling: using evergreen funds ("more scalable than drawdown funds"), building a whole team conversant in alts, from the CSAs to the advisors, and using custom portfolios. 

"You can use technology in a really powerful way to build a scale into portfolios," he said.