The investor education piece of the alts puzzle
While advisers are increasingly eyeing alternatives in client portfolios, two reports have underlined the lack of investor understanding that persists.
There is no denying the rise of alternative investments currently as advisers seek out greater diversification and higher returns. According to Praemium and CoreData research, nearly 70 per cent of high-net-worth-focused advisers have cited the asset class as a necessity for meeting client demands in the future.
Natixis Investment Managers’ report, titled Next Decade Investing, recognised this growing interest, describing: “With traditional bond-equity correlations in question, interest in alternative sources of diversification have increased significantly at the same time that access to private markets is opening up.”
Findings from Natixis show that 49 per cent of advisers say private assets are more attractive given high corrections to public markets, while over 50 per cent say private assets have improved outcomes for clients.
However, the report emphasised that greater education for clients is necessary when entering the world of private market investments.
“More investor education is needed: 72 per cent say that clients do not understand the holding period that comes with private investment.”
Featured in the paper, Eric Deram, managing partner at private equity specialist Flexstone Partners, recognised several issues that require careful consideration from both investors and advisers.
“There’s liquidity for one: despite the emergence of semi-liquid funds, these investment strategies remain fundamentally illiquid and therefore not necessarily advisable to everyone directly – except, through pension schemes,” he wrote.
“Then there’s the cost: private equity products manufactured for private individuals are substantially more expensive than the ones for institutional investors. Clearly, we need to be careful how we educate different types of investors on this point or there’s a danger that we spoil the momentum of potentially enhanced investment performance.”
Aligning with Natixis’ sentiment, the 2024 EY Global Alternative Fund Survey urged alternative fund managers to make significant improvements on the education front.
It said: “If alternative fund managers are to successfully increase their engagement with individual investors, many will need to step up their education efforts significantly – not only among investors themselves, but also among the financial advisers that will incorporate alternatives into wealthy clients’ portfolios.”
For example, some alternative managers are offering client information hubs to ensure investors comprehend the key features that define these types of investments. Others are partnering with external firms to strengthen investor awareness, it noted.
“As with any investment evolution, client understanding and education are central to meeting expectations and achieving successful outcomes. That’s especially true when dealing with UNHW, HNW or retail investors.”
EY also highlighted the role of business development managers (BDMs) in assisting advisers in this area. Alternative firms with ambitious growth plans are signalling their intention to add headcount in areas such as business development, it stated.
One of the responsibilities of these BDMs will be building relationships with advisers to help them understand the firm’s products and intricacies as the managers target the retail and intermediary market.
Money Management previously unpacked the evolving BDM-adviser relationship as BDMs provide invaluable guidance to help advice practices grow.
Fabian Ruggieri, director at financial services recruitment firm RIVA Recruitment, said the type of support BDMs are providing to advisers is largely dependent on the type of investment product they are offering.
He explained: “If you’re promoting a more complex, actively managed strategy with the focus of generating alpha, whether that be in private markets or through alternatives, then the support is more around portfolio construction.
“Whereas if you are focusing on funds that provide traditional long-only equity offerings or fixed income offerings, then it’s about how the BDM helps advice firms to not only construct their portfolios but also help them grow their business.”
AUTHOR
Jasmine Siljic
Recommended for you
The FAAA has secured CSLR-related documents under the FOI process, after an extended four-month wait, which show little analysis was done on how the scheme’s cost would affect financial advisers.
Nearly seven in 10 HNW-focused advisers view alternatives as the asset class that will be fundamental to meeting client demands in the future, according to Praemium.
The Perth-based advice practice has welcomed a private wealth adviser and senior paraplanner to its ranks amid its strategic shift towards wealth transfer strategies.
The number of members expelled from the Australian Financial Complaints Authority almost doubled between 2023 and 2024, according to internal data.
