Allocations to alternatives are growing — and advisors and their clients are helping to push them forward, according to a new report from iCapital, an alternative investments platform used by more than 100,000 financial advisors and more than 250 asset managers.
Currently, just 5 percent of assets under management in alternative investments are held by individual investors, according to a 2023 Bain & Company report on private equity. However, iCapital expects that to change.
The alts investment platform surveyed 400 registered financial advisors between March and April and found that 95 percent of advisors said they plan to allocate the same or more to alternative investments in the coming year. However, lack of knowledge and education are holding them back.
“We have seen a significant increase in appetite for alternative investments, but until relatively recently, a lack of access, understanding, and education was impeding advisors’ ability to put these assets in clients’ portfolios in a thoughtful manner,” Lawrence Calcano, iCapital Chairman and CEO, wrote in the report. “I believe investors will come to see these assets not as alternative, but as a core part of their allocation. That’s why it is important for iCapital and others to develop the tools, research, and education required for advisors to create core portfolios that are inclusive of alternatives for their clients.”
According to iCapital’s survey, advisors currently allocate between 5 to 15 percent of their clients’ portfolios to alts, but client demand could cause that to grow. Fifty percent of advisors said that interest in alternative investments on the part of their clients has increased over the past two years.
Advisors also believe that alts are a good bet. About 60 percent of advisors surveyed expect private markets to outperform public markets over the next 12 months. When asked what they see as the top benefit of alternatives, 79 percent said diversification, while differentiation and access to sophisticated products were the next top benefits, cited by 44 percent and 39 percent, respectively.
Among advisors who are currently using alternatives, 78 percent invest in real estate, 62 percent invest in private equity, 50 percent invest in private credit, and 48 percent invest in hedge funds.
The highest proportion of survey respondents said they were most likely to increase allocations to private equity (36 percent) and private credit (34 percent) in the coming year. And the more wealth that advisors managed, the more they allocated to alternatives. Advisors with at least $500 million in AUM planned to increase allocations at a much higher rate than those with under $500 million in AUM, with 46 percent increasing their allocations to private equity and 54 percent increasing their allocations to private credit. About 14 percent of all advisors reported that they planned to decrease allocations to real estate, while 30 percent planned to increase their real estate allocations.
And the market is growing: According to a recent report by Credit Suisse and UBS, global wealth is expected to rise by 38 percent in the next five years, with the number of millionaires reaching the 86 million mark and the number of ultra-high-net-worth individuals rising to 372,000.
However, high fees and a lack of liquidity could hold some advisors back. Forty-one percent of advisors cited high fees as the top barrier to the use of alternative investments, while 52 percent cited liquidity issues and long lockup periods as other major barriers.
The complexity of explaining alts to clients was ranked next, with 37 percent of advisors saying that was an issue for them. This isn’t surprising, considering that just a quarter of advisors said they felt ”very knowledgeable” about alternative investments as a category. Additionally, 12 percent of advisors said that alternatives were challenging for them to understand.
However, this lack of knowledge could be an opportunity for alternative investment platforms and others to provide much needed education to advisors and their clients.
According to the report, almost all advisors (95 percent) expressed an interest in receiving educational content related to alternatives. Fifty-five percent wanted information on fund-specific content; 42 percent wanted more foundational courses; 42 percent wanted more practice management information; 41 percent wanted advanced topics in alternatives; and 35 percent were looking for how-to guides on the logistics of investing in alternatives.
Advisors were also open to receiving education in a variety of formats, from webinars and whitepapers to short-form videos and online courses. According to iCaptial, “investor-friendly materials” are highly sought after by advisors regardless of how they’re delivered.
“The best results occur when advisors and their clients are appropriately informed on the risks and considerations of investing in alternatives, and as such, it requires an industry-wide effort to ensure that appropriate education and research materials are available,” Steve Houston, managing director and head of investment products, told RIA Intel in an email.