Funds managers urged to up their game on alternatives education
Financial advisers are urging fund managers to improve their education and communication about alternative funds as they actively target them towards retail clients.
Alternatives are growing in popularity with financial advisers for diversification purposes and a higher return, especially in a time of high interest rates. While they have always played a role in portfolios, more and more are holding dedicated allocations to the asset class whereas they may have only been part of a multi-asset fund before.
Research by Schroders found around half (51 per cent) of Asia-Pacific financial advisers and wealth managers expect to increase their clients’ allocation to private equity, while 50 per cent expect to increase allocations to multiprivate asset solutions.
The move comes as fund managers seek to diversify their product mix with niche products where they can charge a higher fee to generate revenue and compete with passive players.
But Deloitte’s investment management industry outlook stated, given the high minimum investments in these types of funds, managers will be heavily relying on advisers to spread the word with their wealthier clients if they want to bring alternatives into the mainstream.
It wrote: “In 2025, expanding the product line-up into alternative investment offerings such as private credit and evergreen or hybrid fund structures, as well as investing in technologies that integrate AI into sales and distribution processes, is expected to be among the most successful revenue-enhancing strategies.
“Financial advisers often play an integral role in educating investors about how these structures work and potential diversification benefits. However, some advisers believe that investment managers do not provide them with sufficient materials to educate clients about alternative investments.”
Speaking to Money Management, investment professionals on the other side of the table discussed their experience using alternatives with their clients and whether they feel they are suitable investments.
Stephen Cabot, investment consultant at UBS Global Wealth Management, said: “With the advent of access to these opportunities, both asset managers and advisers are keen to highlight the portfolio benefits that can come from inclusion of these asset classes where appropriate.
“Given these opportunities are new and offer unique characteristics, managers and advisers are keen to ensure investors know what they are getting into and are dedicating time on educating clients before recommending investments.”
Client interest
Problems with alternative funds compared to traditional equity and bond portfolios stem from liquidity factors which can lead to assets being “locked” in funds during times of stress or market volatility.
“The allure of strong returns needs to be considered particularly in light of, among other factors, the liquidity of the offerings. In normal times these offerings generally have a monthly or quarterly redemption cadence,” said Cabot.
“However, in times of heightened redemption stress, the funds can limit the timing and value of redemptions. There are some vehicles that have done this at different times and the chief rationale is to ensure that the managers are not forced sellers of illiquid assets leading to ‘fire sales’. Most investors can appreciate the motive, however the desire to exit a fund in this position can result in a virtuous cycle.”
“These assets are not transparent and often internally valued, meaning their true performance becomes uncertain,” added Dylan Pargiter-Green, director and financial adviser at Bold Wealth.
Advisers have a duty to inform clients of these risks involved but say clients aren’t always necessarily bothered by the intricacies and technicalities of these funds and rely on the judgement of their adviser.
Roger Perrett, financial adviser at Freshwater Wealth, said: “Often clients do not want the full details of the alternatives investments in their portfolios. Instead, clients rely on the expertise, as well as the trusted relationship with their adviser, for recommendations.”
This was echoed by Josh Lee, director and financial adviser at Link Wealth Group. He said: “Ultimately like most investments, clients don’t want/need to understand all of the ins and outs, therefore, providing a high level understanding of the investment, risk/reward etc. is sufficient in my opinion. Ultimately the clients trust our judgement.”
The knowledge these products come with added risks and liquidity considerations, then puts extra responsibility on the adviser to be across the space.
Cabot commented: “It’s important to ensure clients are aware there is no ‘free lunch’. The attraction of strong returns and the lower mark to market moves providing the perception of a less volatile ride must be considered against the liquidity trade off.”
An added difficulty is there may be some common types of alternatives already in existence but there are also newer products coming to Australia from the US in areas where advisers may not have advised on before.
Lee said: “I do feel confident to recommend particular alternative investment funds which we would agree upon at an investment committee level internally in our business. However, just having returned from a US study tour in which we met with an array of fund managers, there are certainly some alternative fund managers I would not recommend due to not truly understanding the investment.”
Pargiter-Green agreed, saying: “There is a limited source of these sorts of investments to retail level clients outside of the large superannuation funds, when compared to the US landscape. There are certainly some funds that we use in-house that have provided growth and stability to clients’ portfolios, but there are less options to choose from than the listed equity space.”
Fund manager recommendations
In light of this, Perrett said it would be helpful for fund managers to develop a better way of communicating with advisers, both in materials and their business development managers (BDMs).
“I believe fund management businesses have the resources and education for advisers. However, how they offer and provide this information is not ideal and dare I say it – outdated.
“Fund management businesses need to evolve and provide smaller bite-size information via digital means. I would prefer they entice advisers with well-crafted pitches and educating us over time. This will then increase engagement and understanding.”
This echoed Deloitte’s conclusion as well, which urged fund managers to spend the next year making client education a priority as they develop their alternatives ranges.
“Both traditional and alternative investment managers are fulfilling this need by either launching their own platforms or partnering with third-party research platforms to provide financial advisers with educational resources.
“Over the coming year, investment management firms that expand into private credit offerings, particularly across retail distribution platforms, and make client education an integral part of their product strategy may achieve greater success.”
AUTHOR
Laura Dew
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