On this week's episode of the Financial Planning Podcast, Cliff Corso explains why advisor demand for alternative investments creates distribution hurdles for asset managers.
Corso, the president and chief investment officer of Colorado-based Advisors Asset Management, says the industry is being drawn toward alternatives as the need for income and yield increases. But for a long time, retail investors had limited access, making it difficult to find a wholesomely priced product in public markets.
Corso, who joined AAM in 2021, says his team is trying to change that. After searching for a world class alternative asset manager to join forces with, his firm entered a deal with insurer Sun Life to become their U.S. retail distribution arm.
Now Corso is focused on expanding AAM's product roster to include a range of alternative products in commercial real estate, private credit and infrastructure. He said solving distribution hurdles for the advisor community is the goal as hunger for alts that can provide income, diversification and alpha remains unsatisfied.
Generally alternatives are for those categorized by the SEC as accredited investors, meaning individuals with income exceeding $200,000 ($300,000 with a spouse or "spousal equivalent") over two prior years, or a net worth of at least $1 million (not including their home), or certain licenses to trade securities.
However, there are some alts like real estate, wine, art and precious metals that are open to non-accredited investors who want to get in the game.
During his conversation with FP Podcast host and lead editorial producer Justin L. Mack, Corso talks about supporting advisors in challenging times, where alts fit in portfolio construction today, and what alternative categories are heating up in 2023.
Listen to the new episode — as well as to all future and past episodes — by subscribing to the FP Podcast on
Transcript
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Justin L. Mack (00:02):
Good morning, good afternoon, and good evening. Welcome to the Financial Planning Podcast. I'm your host, Justin L. Mack, wealthtech editor with Financial Planning, and it is my pleasure to introduce this week's guest, Cliff Corso, president and chief investment officer of Advisors Asset Management. Cliff, thank you so much for joining us on the show this week.
Cliff Corso (00:21):
Thanks for having me Justin. Much appreciated.
Justin L. Mack (00:23):
Absolutely. And Cliff is bringing his expertise in alternative investments, structured and private credit, real estate and structured lending to this week's show. His crew at AAM, which he joined in 2021, is one of the largest distribution partners for advisor solutions in the country. Before AAM, Cliff was at Inside Investment and served as the executive chairman, a move he made after BNY Mellon's acquisition of Cutwater Asset Management in 2015. And while at Cutwater, Cliff held the dual roles of CEO and Chief Investment Officer and helped build the firm to one of the largest fixed income managers in the world. Throughout his career, he's also served as a credit analyst, lender, restructuring specialist and trader. So needless to say, Cliff's a busy guy who knows this industry inside, outside and upside down. And today we're going to be talking all about alternatives. Chiefly, advisor demand for alts and the distribution hurdle that creates for managers. We'll also get into how AAM is trying to alleviate this challenge for advisors, some of the alternative categories that are going to be hot in 2023 and everything else. But first Cliff, let's start at my favorite part of any story. The beginning. How did you get yourself into this industry in the first place? We've gone over your wide range of expertise and experience, but how did you first get wrapped up into the world of financial services?
Cliff Corso (01:38):
Yeah, it's an interesting question. Been in the field for over 35 years as you mentioned, but what really got me there interestingly was one of my economics professors at Yale University in the 1980s. Now before you judge me, I know many of you think economics could be kind of dry.
Justin L. Mack (01:58):
<laugh> Hey, no judgment, I'm in communication and reporting. Quite a few folks weren't that jazzed about that either. So no judgment here.
Cliff Corso (02:05):
<laugh> Indeed. Obviously the topic can sometimes be dry, but that has always been an interest of mine in combination with my fascination around markets. My father was in the business and (talked about it) just around the dinner table. So my senior year, I had a seminar with a professor who was pushing everyone in that class to be thinking about what the real world is when you come out of college. And he challenged me in a senior seminar to show how macro policies and macroeconomics might interrelate with the real world. And, in particular, my interest in markets and stocks and bonds and currencies. So when I graduated I wanted to take these theories that I had learned and studied and apply those to the real world of economics and markets and well, we see what's going on with the Fed and fiscal policy. I'm glad I have the foundation. Let me just put it that way. But that's really what got me interested in the field.
Justin L. Mack (03:12):
Awesome, awesome. So yeah, true, genuine interest that sounds like you developed when you were younger. Like you said, at the dinner table and now that has grown into a 35-plus year career where you've had a chance to hold a number of roles and I imagine that fed that interest and desire to apply what you've learned to the real world. And the real world, as you've kind of already alluded to, is a wild and crazy place, a lot to manage, a lot to keep an eye on, especially with the way the markets are doing what the markets do. <laugh> So with that of course the name of your organization, advisors front and center in the work that you're doing: Tell me a little bit about how AAM is supporting advisors? What kind of work do you do to make their lives a little bit easier?
Cliff Corso (03:49):
You hit a little bit of the key point earlier on where, and our name says it all, Advisors Asset Management. Our whole business is focused on helping the financial advisor achieve the goals and objectives that they're trying to achieve on behalf of their clients. Individual investors whose money they manage. And so the model is built around the advisor and the way we help them. One of our key strengths is over 40 years, we've developed a platform where we can allow advisors access to world class, best in class institutional asset managers who are not offering products or strategies or solutions to the retail market. And we represent that bridge between those best in class institutional managers and the financial advisor. So we carefully vet the institutional managers that we partner with and we view them as long-term partnerships across a variety of asset classes, whether it be equities, fixed income, and now as you have mentioned alternatives coming very, very, very soon.
(05:03)
We also have about 270 investment professionals spread across the country. So we're meeting the financial advisor where they live. We're traveling and we're offering not only those solutions. We're supporting the advisor through our own outlooks on markets, our own views of what might be in front of us in terms of economies and impacts on markets. And we're there with them the whole way. We're not just selling something and moving on. We're with them the whole way through. So over that last 40 years, we've been able to produce for our own business about $40 billion of assets under administration or supervision, which really represents the financial advisor utilizing our strategies on behalf of their clients.
Justin L. Mack (05:51):
Absolutely, and let's pivot into that part of the conversation. We kind of queued up talking about alternatives and the work you're doing with them and supporting advisors and how that all ties together. It's the topic of alternatives and the best way to use them. Their importance right now has been something we've talked a lot about on this platform and also in the pages of Financial Planning. But I wanted to get your perspective, especially as we're at the turn of the year, a time where people are looking at priorities and what's going to be happening and where they expect things to go and trend, which no one can predict. I think 2022 is <laugh> a good example of why even when you try to predict things at the start of the year, you'll probably be wrong. But I would love to get your thoughts on why you think the awareness and the conversation around alternatives continues to heat up right now. And as you've kind of mentioned, in the past couple of years, it's been more and more prevalent and understood their importance. But for you, what's driving that demand and that interest right now?
Cliff Corso (06:47):
Yes, and again, really being driven by our goal of helping the financial advisor continue to evolve and do the best job they can for their clients. And so alternatives are a segment of the market that can really help add value to portfolio construction for advisors, and institutional investors have had access to alternatives for the better part of two decades. If you look at that market, the institutional market, what you'll find is upwards of 15% allocation to alternatives within portfolios and as high as 50% for some of the institutional segments in the market like endowments. So they're scaled quite large in terms of utilization in the institutional markets. Now why haven't retail investors had access or why haven't they grown their exposures? And typically what you'll find if you look at the numbers is that the retail market has about a little less than 5% exposure to alternatives.
(07:54)
And the key reason that is, and it's changing very rapidly now, is that historically it's been very difficult for the retail investor or the financial advisors to access alternatives. First and foremost, the institutional market wasn't really focused on the retail segment, the institutional market of asset alternative asset managers was really where it started. But we see the evolution of alternatives growing in retail portfolios, much like you see the evolution of many institutionalized products ultimately working their way into the retail market. So there's a renewed focus. Many of the pain points around accessing alternatives have undergone significant innovation over the last five years. An example of the pain points would be historically for retail investors would be very complex documentation, very complex tax treatments, and very long lockups of the investment capital. All that's been changed with the advent of some of the newer innovations in vehicle creation.
(09:09)
And you might have heard terms like non-traded real estate investment as a way to access real estate or non-treated business development companies as a way to access private credit. And those vehicles have simplified the tax treatments, have simplified the paperwork and access and have also provided for less lockup. So a lot has changed there. And the institutional alternative asset managers are focused on it, the financial advisors are focused on it and we see very strong growth within the retail channels in the uptake of alternatives with ultimate targets by home offices of the wirehouses and RAs of somewhere upwards of 15%. And that obviously is a large change from current allocations of less than 5%.
Justin L. Mack (10:01):
Absolutely a massive change. When you think about what that really means as far as the bottom line, and you've kind of talked about the things that are changing access and reducing some of that complexity and some of those barriers that used to exist, especially for retail. Do you expect that to continue? Do you think that 10 years from now we won't even be talking about access difficulties or do you think that we'll still have some kind of barriers as far as being able to connect any kind of investor with alts, regardless of what they're interested in?
Cliff Corso (10:29):
I think it'll continue to grow with more and more access. And I think the barriers will continue to dry up because there's continued progress on the innovations just in terms of dollar size access getting smaller and smaller, meaning smaller and smaller investments, individual investments can be made. That trend is actually picking up speed. You'll actually even see Congress discussing ways that 401(k)s might be able to access alternatives. And again, the main driver of the whole move here is that alternatives can provide valuable support to better outcomes in portfolio construction. And even though rates have come up a little bit, Justin, as we've seen obviously maybe more than a little bit.
(11:19)
<laugh> There are still many challenges. In fact, our view is that we've got a real regime change here and the challenges of only looking at what has historically typically been a model of 60% equities, 40% bonds. Obviously, that was a real challenge last year. We think that many investors, and what we hear from the financial advisors as well, is that they're concerned that there's a long wave, multi-year, maybe decades-plus regime change going on. When I entered the business world in the 1980s, rates were 12% down to zero. Now back up a little bit, that tailwind for public markets has now maybe become a headwind. And what alternatives can do is they can provide a little bit more diversification. Certain types of alternatives can provide steady income. And again, other certain types of over alternatives like real estate and infrastructure can also be a decent hedge against inflation. So these are all the challenges that financial advisors are facing and why we think the trend is not a trend. It's more of a secular trend that in our minds will last many, many years to come.
Justin L. Mack (12:36):
Absolutely. And with that, we're going to take a quick break and enjoy a word from our sponsors, but when we return we'll have more with Cliff Corso of Advisors Asset Management. Stay locked and we'll be right back after this break.
And welcome back to the Financial Planning podcast. I'm your host Justin Mack, and we are diving back into our conversation this week with Cliff Corso of Advisors Asset Management. And Cliff, before the break we went into your pathway into the industry, the work you're doing with AAM and the importance of what's driving the conversation around alternatives in wealth management right now. But that is obviously a big term. You say alternatives that can mean so many things. So I would love to talk to you about some specifics, especially looking into this year as far as the types of alternatives and the different categories that you think are going to be the hottest and draw the most attention as both institutional and retail investors continue to show their interest.
What do you think is really going to lead the way as far as types of alternatives that can make a difference this year?
Cliff Corso (13:33):
Well you make a good point, Justin. Because alternatives … that phrase casts a very, very wide net. And for instance cryptocurrency is an alternative. There are so many different types, but there are three categories in particular that we see significant demand within alternatives. And we think that that trend also continues for various reasons. And those three sectors of the market generally are steady income producing alternative categories. And the three that we see great growth and expectations for continued growth are private real estate, private credit and private infrastructure. And the commonality, again some of the key commonalities across those three segments are that those asset classes tend to produce steady income and also have the added benefit depending on the sub-sectors within those categories of being a reasonable mitigant or hedge against inflation. So what we've seen this year, the last three years actually and the expectation for this year as well, is that. Just to put some numbers on it for the listeners.
(14:53)
Last year in the retail market there was just shy of about $100 billion that went into alternative asset classes, many of which we touched on a few moments ago. But by far the two dominant categories within those numbers were private real estate and private lending or slash private credit. You'll hear it both ways. Those two segments captured nearly two thirds of the alternative flows mentioned earlier. So they're really dominant and there's a significant continued demand within those sectors of the market. Why? Well again, it goes back to the properties of those sectors real estate, private credit private lending, those are income oriented sectors. They tend to produce steady income as a significant component of the total return of the asset classes. And even though rates have come up more investors are still challenged by trying to find steady yield, predictable yield. These asset classes can help do that.
(16:02)
Private markets are much less correlated to the public markets. The assets tend to be priced on discounted cash flow, meaning what is the value of the asset in the private market. And so they tend not to be as exposed to the vagaries of some of the quick flows in and out of markets, and they can be steady diversifiers within the portfolio. Infrastructure is a little bit of a newer alternative asset class or retail but it's got a very long secular tailwind as we see with money being spent and in the fiscal stimulus and dedicated to infrastructure projects. Obviously, we know we've got a long-term need to rebuild our infrastructure, certainly here in the U.S. And so it has a big secular tailwind but also an income-oriented asset class. Therefore, it's the fastest growing segment of the alternative markets. So we would expect those three sectors of alternatives to be a dominant place for allocations for retail for the next few years.
Justin L. Mack (17:08):
Fantastic. And knowing all that and what you're going to be focusing on as far as the different categories, as far as the work you're going to be doing at AAM specifically and the work you're most interested in continuing to solve for this problem … we know that six months from now maybe we'll need to catch up to see exactly what's going on as far as rates and what people are talking about. Because it's been a wild ride over the past 12 to 18 months. <laugh>
So you, specifically, what are you going to be focused on in 2023 as far as AAM's work and helping to continue to push that access for alternatives and make things easier for advisors and their end clients?
Cliff Corso (17:47):
Our business is very focused on evolving along with the needs of the advisor. And so as we've talked about, alternatives can play a very significant role. Really for us it's about the value add of the solutions and the partners we pick so that we can work with the best in class and offer that access to the financial advisor market. So this is a top priority for AAM. Expanding our partnerships with world class, best in class alternative asset managers so that we can bring those products to the financial advisor. We recently announced, and actually I spent many years looking for the right partner with the alternatives, and we believe we've found that partner now in Sun Life. We've announced the partnership and why Sun Life … they're a world-class financial organization. A very large, well-respected financial organization.
(18:47)
They have two principle focuses, and one of the big ones is asset management. They have world-class capabilities in private credit, real estate and infrastructure. Those are the three areas that we think will be most valuable to financial advisors. And so we're in the process of designing and building out our offerings to the retail market within those categories. And we're really excited about it because our 40-year history has made us successful. We're applying that same principle, which is world-class solutions coming from AAM, allowing access for the financial advisors and then full support education and council coming from AAM as well. So that's a big area for AAM's focus and certainly an area of my focus, having built alternative capabilities for other firms that I've been with historically. It is just a really exciting time for AAM, and 2023 is going to be a very exciting year.
Justin L. Mack (19:52):
You're going to be busy. And as we've mentioned in the lead up to the show, it sounds like being busy is a status you like to be in from all the different roles you've held and different endeavors you've taken on your own accord. So I'm sure you're very happy to have such a full plate for 2023. And with that, I love to close with something that has become customary here on the Financial Planning Podcast, especially as we talk about the work you're doing, specifically looking back on what you love most about your job. What do you like most about this industry? What keeps you coming back from that passion that was sparked talking to your father at the dinner table and studying economics? Again, no judgment on the dryness of that subject, but after all these years, 35 plus, it still seems like you're excited about the work you're doing. What do you love most?
Cliff Corso (20:36):
Yeah, and you hit a key part of it. Just the whole world of economics and markets. It's a world that is constantly surprising people. It's not a script that's just written, and it just continues to evolve as we move through time. And that's just an exciting thing. And what do I love about my job at AAM? Well, let me just say I believe I have a great job as president and CIO of AAM. First the people of AAM: I feel that I'm very lucky to work with a great group of professionals focused on financial advisors. The key is, are we doing something valuable? And I believe we are in helping financial advisors succeed. The second thing for me is guiding the business strategy. That's the alternatives being the top priority. And I really like building businesses and helping businesses grow. So that's very exciting to me. And the third, just what got me into the business, as I said earlier in the first place, I just love investing in the markets. And as chief investment officer of AAM, I get to take that 35 years of learning and history and experience and apply those skills and advice. So it's just a great combination, a great firm and a great opportunity.
Justin L. Mack (21:58):
Well I love to hear that enthusiasm and always love sharing the story of folks who work in this industry and who love it as much as you do. So I want to thank you for sharing that passion, the work you're doing and your time with us this week on the Financial Planning Podcast.
Cliff Corso (22:11):
Thank you, Justin. I appreciate you having me on.
Justin L. Mack (22:14):
Absolutely. And I want to thank everyone for tuning into the Financial Planning Podcast. This episode was produced by Arizent with audio production by Kevin Parise. Special thanks again to our guest, Cliff Corso of Advisors Asset Management. Rate us, review us and subscribe to all of our content at www.financial-planning.com/subscribe. From Financial Planning, I'm Justin Mack. Thanks for listening.