Rocket Dollar CEO Henry Yoshida
The veteran financial advisor and
"The term alternative, it scares people. But think about real estate. Call it an alt, but it's buying multifamily homes. It's buying industrial. You have a tangible asset that grows and creates rent. Beyond just buying a bond and holding it, it's about as safe as it gets," Robuck said. "I would encourage advisors to continue to seek out ways to provide their clients with exposure to some of these asset classes that will continue to perform extremely well, continue to bring down the volatility of their portfolio and continue to provide more diversity rather than just stocks and bonds."
Studies show he isn't alone in that sentiment, especially now. Research from Cerulli Associates
Demands for income, inflation protection, enhanced returns and volatility dampening are colliding with an increase in supply to create this moment, according to the study. Advisors polled by Cerulli during the first half of the year reported average alternative allocations of 14.5% in client portfolios and expressed desire to push the average to 17.5%, or close to one-fifth of portfolios, over the next two years.
"The figures are unexpectedly high (above the already elevated 10.5% suggested by the 2021 survey) and contradict the asset amounts currently invested in such alternative strategies," the Cerulli report states. "Still, Cerulli finds the response to be indicative of a mood where a range of alternative allocations hit their stride — from commodities playing a greater role due to inflation and the Russia-Ukraine war to private capital exposures offering income and volatility smoothing.
"Advisors are increasingly aware of these product offerings as a wave of both traditional and alternative managers build out capabilities and wholesalers reach out to explain the benefits of the exposures."
In the Cerulli study, 69% of advisors report reducing exposure to public markets as a top reason for using alternative investment products in 2022, and 66% said the goal is volatility dampening and downside risk protection.
Across investment structures, liquid alternative mutual funds are the leader with 68% of advisors reporting they currently use them. Liquid alternative ETFs were next with 54% reporting some allocation.
The data problem
But research also suggests that challenges remain when it comes to management of alternatives — challenges that seem perfectly suited for fintech to step up and solve. A study published
F2 Strategy co-founder and CEO
And in this case, Fritz said the digital roadblocks aren't the fault of lacking technology. They're issues caused by the industry itself. The lack of clarity when it comes to pricing and the wild variance among data formats exist "because of the nature of the industry itself."
"There are solutions in the market, and some (firms) are trying some of those solutions out from the
Frustrations aside, the F2 survey showed that most firms offering alternatives are turning to tech to make sure they get this Goldilocks moment just right. And solutions providers are aware of where the pain points reside.
Teamwork makes the dream work
Fritz noted iCapital as one of the companies trying to solve the data problems.
The consortium, which includes Apollo, BlackRock, Blackstone, BNY Mellon, Carlyle, KKR, Morgan Stanley, State Street, UBS and WestCap, is partnering with iCapital to make acquiring and servicing alternative assets easier.
iCapital leaders say creating a shared record for each alternative investment augments the efficiency of the investment creation, management and exit processes. It also eliminates the need for each party to take in data, reconcile it to their records and share new versions of the data with others.
In late March, it was announced that iCapital, UBS and Envestnet were joining forces to
Officials said the platform comes as high net worth and ultrahigh net worth investors are increasingly looking to diversify into alternative investments, noting that these investors are expected to increase private equity investments by a compound annual growth rate of nearly 19%, and global high net worth investor commitments to private equity are expected to climb to $1.2 trillion by 2025.
But if data struggles get in the way, that growth could be stunted before he can truly take off.
"At iCapital, we are continuously enhancing and building technology to meet the industry's needs, and we know that data quality is a priority for advisors," iCapital Chief Information Officer Tom Fortin said in an email to Financial Planning. "(The consortium) It has tremendous potential to act as an industry standard, single source of data for multiple participants across the ecosystem, and to significantly reduce time and errors in the process."
Fritz said along with the approach iCapital is taking, the data problem could be solved by an organization like the
"The fourth way to do it — and I hate to say this because I think it's more buzz and chicanery than it is reality right now — but blockchain will do a tremendous service to us because the ownership structures are not going to be translated by documentation. It's going to be translated by an actual key and code," Fritz said. "But that's when a lot of the problems in private equity and alternative investments can go away —when the ownership structures and transactions are actually put on to a shared ledger."
Scaling back, or sitting out?
The F2 survey also included results that were somewhat surprising to both Fritz and Robuck. Namely the survey finding that while 40% of wealth management firms involved in the alternative investments space expect to accelerate AUM growth in 2022, 47% of firms expect to decelerate AUM growth.
Hedge funds are targeting 93% growth in AUM over the next two years followed by private equity/venture capital at 87%, and real estate/real assets at 87%. The top five is rounded out by private credit and funds of funds at 80% and 47% growth, respectively.
In some cases, firms report the deceleration is due to client demand not being as strong as they anticipated. But all agree alternative investment opportunities are cumbersome to manage due to the aforementioned data blocks.
Fritz said there are also a number of firms polled by F2 who said they simply don't deal with alts at all.
"We do not see the penetration of alternative investments like the industry probably thinks there is," he said. "It's not a universal rule that 100% of all wealth firms have an alts platform."
That experience rings true for Robuck who can point to a number of reasons firms may sidestep the asset class based on his own experience.
"I was at a firm where we used liquid alts, and the firm decided to use two alts in each space just to cover their bases. And one would be up 15, one would be down 17. Then one would be up 10, the next would be down eight," he said. "It was just like throwing darts, and it was very frustrating because nobody could figure it out, and they were doing that to hedge their bets."
He said another firm he was with decided to avoid illiquid alts entirely because of the consolidation of the industry.
"Everyone's buying everybody else. And everyone is using money to not only drive organic growth, but also trying to buy other firms with that thought of the big payday at the end and selling all of it," he said. "And to be able to do that, it's much easier to do with just stock and bond liquid portfolios that you can just put into a model, acquire somebody and then sell the whole package. Alts, to do it correctly, really is a tremendous amount of work."
Putting in the work
But like Robuck,
Yieldstreet is a digital wealth management platform that works to expand access to investments across asset classes like real estate, marine finance, art finance, legal finance and commercial loans.
Mehere said ultrahigh net worth investors and the rest of the top 1% have long had the ability to invest in alternatives and have been benefiting because of it. But technology is leveling the playing field and opening up that opportunity to more investors than ever.
"Historically, we've been told that 60/40 is the way to go. But 60/40 hasn't performed well in 15 years primarily because everything from active has moved to passive, to ETFs and index funds. And people are not getting returns in their portfolio," Mehere said. "You're seeing a lot of coverage around how the 60/40 is dead. And we're big proponents of it because we feel that private markets and alternative Investments should be a core part of a person's portfolio up to 20% to 25%.
"Of course, you need to have exposure to public markets. But if you think about today and what has happened in the last six months, all of our public markets portfolios have been obliterated, and people who have alts fare a little bit better than people who don't."
He adds that the industry is in the process of "crossing the chasm" from early adopter to widespread use when it comes to alternatives. But technology will be required to help everyone make the journey unscathed.
"I feel it's a golden age for fintech, and I think it's an amazing time to be in wealthtech because what's happening is boundaries are going to be collapsed. You're going to get access to products around the world, and it will all be delivered directly to you the way Yieldstreet does, through a mobile app that's easy to understand that keeps consumer interest in mind and has a tremendous focus on education," he said. "And think of some of the asset classes we can provide access to. We have fractionalized art. So what you can do now is invest in a Basquiat or in a Banksy at a very low minimum, build an art portfolio of 10 to 12 artists and buy a fractional part of that fund. And as the artist increases in popularity … people can take part in it."
Robuck, meanwhile, believes alternatives can be a powerful tool to help wealth managers personalize their services and escape the sea of sameness.
"I believe that a normal 60/40 or stock and bond portfolio is a commodity these days. Robos do it. Every single company can do it. A Nobel Prize has been won for constructing a correct portfolio that sits on the efficient frontier. So I really think that there's not a lot of differentiation between firms when they simply stick with that and then add a little financial planning or some tax planning on the side. That seems to be the trend. So we really set out to truly differentiate ourselves, be client-driven and invest the money and time to really be able to offer alts in a transparent way which flows directly into our reporting software.
"The goal has always been for us to offer high net worth clients an ultrahigh net worth experience and access."
