Miami, FL - 10/04/2022

Beware Of Hidden Complexities In Alts Investments

In the lead-up to the most recent Fed policy meeting, some investors were optimistic that policymakers would become less hawkish in the coming months. The price of oil had declined dramatically from highs set earlier in the year, while July’s CPI print indicated that inflation, though still high, was showing signs of abating.

Those hopes, of course, were off base. Spurred by more recent data showing that inflation in August was higher than many expected, the Fed raised rates by 75 basis points last month. Moreover, Chairman Jerome Powell has continued to underscore that the Fed will do whatever is necessary to snuff out inflation in the form of further rate hikes. Since then, stocks have plummeted, further souring an already poor market environment.

FA Beware of Hidden Complexities in Alts Investments: Portrait of Steven

Steven Brod is CEO of Crystal Capital Partners, an alternative investments platform for financial advisors.

Not surprisingly, the mounting economic and market challenges in 2022 have sparked a renewed interest in alternative investments, including private credit, private equity, and hedge funds.

In the past, most individuals had few, if any, opportunities to deploy capital in this space, so just getting access was a massive challenge for all but institutional players.

But in recent years, there has been a proliferation of alternative investment platforms that enable financial advisors to align access to alternative assets with their clients.

While this seems like a positive development, access to alts is just a starting point. There are multiple additional issues to consider, and not every alts platform is well positioned to support advisors with them. Consider the following:

Quantifying appropriate alts exposure to complement traditional 60/40 portfolios.

How do you quantify the appropriate level of alts exposure that a client should have relative to traditional portfolio models? Answering this pivotal question requires working with a platform that provides high-level analytics, something most alts platforms don’t offer, while many other alts platforms charge financial advisors extra costs to utilize their analytical tool suite.

To successfully align alts with their clients, financial advisors need to seamlessly benchmark funds against existing portfolios and against other funds in the same universe. This should include both simple and advanced analytical tools that allow advisors of all skill sets to benchmark with ease. Advisors may want to upload current client portfolios and measure the effects alternatives can have on their risk/return metrics. Or they might want to see how funds on the platform match up against each other. Regardless of the analytic details, alts platforms need to deliver a one-stop destination for shopping, comparing, buying and managing alts.

Managing alternatives post-sale.

Managing alternatives post-sale can be cumbersome. Typically, after someone buys an investment, the broker/salesperson gathers their commission, disappears and moves on to the next sale, never to be heard from again. Unfortunately, due to the profile of alternatives, the asset class cannot receive the same treatment. From the illiquidity of alternatives, to the rebalancing of portfolios, financial advisors need a comprehensive level of post-sales support.

Juggling the volumes of paperwork associated with alternative investing.

Investing in alts requires a tremendous amount of work to successfully manage subscriptions, redemptions, rebalancing, liquidity, capital calls, distributions, statements, K-1s, and other key operational requirements that go into building and maintaining alternative investment portfolios for clients. Transactional platforms, given their multiple feeder structures, are forced to issue these statements one by one, client by client. This can create an avalanche of administrative burdens, given that most clients don’t invest in just one alternative fund.

Rather, clients generally have exposure to many funds, across different managers and asset classes. To enable financial advisors to manage all of this adequately, alts platforms must allow for consolidation of each of these items. While no advisor should have to tackle these items themselves, that’s precisely what some alternative investment platforms force them to do.

Removing conflicts in how funds are selected for the alts platform.

Ideally, alternative investment platforms only offer funds that have been fully vetted by a team of due diligence and investment professionals, therefore removing subjectivity, and providing access to managers that have a long-established track record of investing through multiple market cycles. Unfortunately, that’s not what always occurs.

It has become increasingly common for platforms to accept some sort of compensation from the funds in return for distribution, a practice that is conflictive in nature with providing objective advice. Indeed, it not only creates conflicts for the platform in terms of fund selection but ultimately dilutes the quality of products that advisors push to end clients. To minimize potential future headaches, financial advisors should kick the tires carefully with potential alts platform partners to ascertain whether their manager selection process is truly conflict free.

Due to their lack of access and understanding, many financial advisors have kept alternative investments at arm’s length. But with stocks taking a beating and the uncertainty surrounding the economic environment, they are increasing their appetite for such vehicles. If advisors are going to help their clients invest like their institutional peers, they should have access to the same sort of resources that they do. Sadly, most do not.