Mindful of risks, RIAs steer clients into private markets

Despite persistent skepticism about their risks and costs, private markets continue to exert a strong pull on assets managed by financial planners.

And registered investment advisors, who are under a fiduciary obligation to always put their clients first, are among the most eager to help investors find a way into the sometimes treacherous world of private equity, private credit and other alternative investments. Tim Thomas, the chief investment officer at Seattle-based RIA Badgley Phelps Wealth Managers, said he won't even consider private markets for clients unless they have more than enough money to pay for everyday expenses, emergencies and other contingencies. For those with sufficient liquidity, he'll often recommend they dedicate as much as 15% of their portfolios to alternatives.

"And some clients may want more," Thomas said. "We do see others allocating up to 30% or maybe even a little bit higher. But I'd say for us, as a base, and without having all kinds of client details incorporated, we'll be looking at 10% to 15%."

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Thomas is far from alone in seeing benefits to putting clients into alternatives to stocks and bonds. A recent poll of roughly 160 financial advisors by the asset management giant Blackstone found that nearly 80% of the respondents plan to increase their allocations toward private markets this year. And the investment bank Robert A. Stanger reported last month that $122 billion was raised in 2024 for alternatives, topping the previous high of $105 billion set in 2022.

Diversification and who's asking about private markets

Private investments' appeal outpaced that of any other type of investments advisors were asked about in Blackstone's survey, which was conducted from October to December. Only 7% of the respondents said they wanted to increase their allocations to stocks, while an equal percentage said the same about bonds and other fixed-income investments.

The results also aligned with what Thomas and many others see as one of the primary benefits of private markets: Their ability to offer diversification. Just over half — 55% — of the respondents to Blackstone's survey said their top priority for this year is diversifying portfolios. That exceeded other goals such as preserving capital (the priority for 18% of the survey takers), generating income (11%) and securing higher returns (13%).

Thomas, whose firm works primarily with wealthy clients, said general awareness of private markets has certainly grown in recent years.

"We have had a number of clients come to us and ask for these offerings, whether it's private equity, real estate, private credit, what have you," he said. "It is something that is on clients' minds and something that they are asking for. And then the other thing for us is we're just looking to broaden the opportunity set for our clients."

More often than not, though, it's advisors who are initiating conversations about alternatives, said Loren Fox, the director of research at FUSE Research Network. FUSE, which offers analysis and consulting on asset management, estimates the amount of money dedicated to private markets will increase from roughly $1.7 trillion today to just over $3 trillion by 2029.

Portfolio diversification has become a priority for many advisors, especially after stock and bonds markets crashed in 2022 and cast doubt on the supposed resiliency of the classic 60-40 portfolio. (Composed of 60% of stocks and 40% of bonds, the 60-40 portfolio is grounded in the idea that stocks and bonds tend to gain and lose value in opposite directions. When stock prices fall, so the theory goes, bonds rise, and vice versa.)

But Fox said advisors have many reasons for considering private markets.

"If you're interested in income solutions, I might say, 'Let me talk to you about private credit,'" Fox said. "Or if we're worried about inflation, I might say, 'I have an idea. It's an alternative product that could be part of your inflation hedge.'"

Lower barriers to entry

For many years, investing in private markets had entailed reams of messy paperwork and bureaucratic tangles, detracting from their appeal for advisors. Now, though, many large asset managers have made it their business to lower the barriers. Well-known names such as BlackRock, Fidelity Investments, Franklin Templeton, JPMorgan and PIMCO are among the leading firms pushing the doors to private markets open a bit wider.

Michael Becker, a partner at the St. Louis-based RIA Toberman Becker, said accompanying documents for private investments used to run upward of 100 pages. Many opportunities were offered only to "qualified purchasers" — or investors with at least $5 million to commit. 

Those eligibility criteria have also been loosened. Now clients seeking to put money into private markets often need to qualify only as "accredited investors," meaning they have a $1 million net worth excluding the value of their residence and have made at least $200,000 annually in the past two years. Becker said his firm uses services offered by the fintech firms CAIS, iCapital and +Subscribe, which have eliminated many of the paperwork barriers to joining private markets.

"With the advancement in technology, you can do most of the [subscription] docs now through DocuSign or platforms that offer online onboarding," Becker said "And then there's a lot better reporting now, and they're a lot more transparent."

Becker said he recognizes there are "a ton of bad" alternatives out there and he relies on outside expertise for discerning which are best suited for clients. Firms like Blackstone, JPMorgan and BlackRock have not only the resources needed to suss out the best options for clients but also enough assets under management to truly diversify their bets in private markets.

"I think when you find funds that have a shorter track record, a smaller investment team and smaller investment pool, that's when you get a lot of risk based on the manager of those funds," Becker said.

Fewer public opportunities, more private

But investors who totally avoid private markets may be leaving some good investments behind. Becker and other advisors often note that the number of companies listing themselves on public exchanges has fallen precipitously in recent decades. 

A research paper published in August 2022 by The Ohio State University's Fisher College of Business, for instance, found that the tally for publicly traded companies in the U.S. had decreased by half from 7,509 in 1997 to 3,530 by the end of 2020. With fewer options in the public markets, private equity and credit are likely offering some of the best opportunities today, Becker said.

Becker acknowledged the fees charged by large asset managers can be high — sometimes running to 2% of the assets of being invested. As a fee-only RIA, Toberman Becker doesn't receive commissions or other payments for directing clients to certain investments managed by third-party firms. It only sees monetary gains if the total assets it has under management rise in value.

Becker said the high fees are justified in part because the asset managers who charge them will take a very active role in the companies they're investing in through private equity or lending to through private credit. Many times, they'll have seats on an investment recipient's board.

"So you have the boots on the ground aspect where these companies send in very established management teams and have a very active role," Becker said. "I wouldn't say in most cases, but in some cases, we view those fees as worth it because of the professional management that you're getting."

Wealth firms aim to stay competitive with alternative investments

Fox of FUSE Research noted that large asset managers are not merely providing products that make it easier for regular investors to both enter and exit private markets. They're also putting considerable resources into educating the public on the benefits and pitfalls of alternatives.

Advisors would do well to listen, even if they aren't enamored of alts, Fox said.

"It's not just so that the advisor can understand alternatives," he said. "It's also so they can answer all the questions that their clients are coming to them with. The last thing you want as an advisor is to have your client ask a question you can't answer. Nothing starts to erode trust faster."

Many of the biggest wealth management firms also see their future lying partly at least in private markets. In an earnings call last month, LPL Financial CEO Rich Steinmeier told analysts that his firm has made private markets a priority in its push to work with high net worth clients. 

LPL has sought to lower barriers to investing in alternatives in at least three ways, he said. Last year, it began allowing advisors to hold alternative assets in its custody service for safekeeping.

"And that ability to custody alt meant that we now had the ability to onboard 2,500 products available to transfer and hold inside of our custody, which is really important to advisors as they change firms," said Steinmeier, whose firm is one of the most active recruiters in the industry.

Steinmeier said LPL has also invested in digital systems designed to make it easier for advisors to buy alternatives for clients. He said LPL ended 2024 with 80 agreements allowing for the purchase of products from managers of private equity, private credit and other similar investment vehicles. That was more than double the number of such deals it had the previous year.

"You put those three together, we think that advisors will get more comfortable on our platform positioning alternatives as a credible and important component of portfolios for their clients," Steinmeier said.

Not to be excluded, LPL's rival Raymond James filed paperwork with the Securities and Exchange Commission to start its own "interval fund" for private credit. These sorts of funds lower barriers to pulling money out of private markets by offering to buy back investors' shares at set intervals, but they still don't offer the almost unlimited liquidity that comes from the stocks and other traditional investments.

All that means it's only likely to get easier to move clients into private markets in coming years. For advisors like Thomas at Badgley Phelps, the task then becomes finding which investments are most likely to provide the most diversification and return benefits to investors' portfolios at the least risk.

"I should really stress that we're making a move into this space, but it's not a market call," Thomas said. "It's really more about improving the overall asset allocation and broadening the opportunity set for clients on a long-term basis. It's not about: We think this is a time for private equity. It's much more that on a long-term basis, we feel these assets can help improve the risk and return of the portfolios, rather than saying, 'This is a once in a lifetime opportunity in this asset class.'"