Our US Correspondent Charles Paikert sat down this week with Bill Crager (pictured) and Bob Oros to discuss their entry into private markets, its suitability for RIAs and their clients, why they believe private investments will become a staple for RIAs and the controversy and criticism that has accompanied this asset class.
It would be hard to find a bigger investing story than the
massive push to expand private market assets, which now total
over $27 trillion in the US, to the registered investment advisor
(RIA) retail marketplace. It shouldn’t come as a surprise then
that two of the RIA industry’s most prominent executives in
recent memory are now fully immersed in the private market space,
Charles Paikert highlights.
Bill Crager was the co-founder and former CEO of Envestnet, one
of the largest providers of turnkey asset managers programs and
fintech software to RIAs. Crager is currently a founding partner
at iAltA Holdings, which provides software infrastructure for
private market data, and just launched Field, an AI wealthtech
company.
Bob Oros was chairman and CEO of Hightower Advisors, one of the
country’s largest RIAs for the past seven years. Before that,
Oros was a senior executive at Fidelity, LPL Financial and
Charles Schwab. He is now vice chair at PPB Capital Partners, a
firm that sells alternative funds, investment products and
operational support to advisory firms.
Family Wealth Report sat down with Crager and Oros to discuss
their entry into private markets, its suitability for RIAs and
their clients, why they believe private investments will become a
staple for RIAs and the controversy and criticism that has
accompanied this asset class.
Family Wealth Report: Why did you decide to enter the
private market space?
Bill Crager: The asset class and the product innovation in the
asset class has far outgrown the infrastructure. From where I
come from, back in my days at Envestnet, we built foundational
infrastructure for the industry, and what followed was the rise
of a managed account environment for the independent advice
space.
Our market is missing that kind of infrastructure that creates a
real scale and integrated scale for the independent advisory
space and that always interests me. To me, that’s opportunity.
Bob Oros: For me, running one of the largest RIAs in the US, I
saw an increasing demand from advisors and their clients for more
opportunities to invest in the private markets.
And as I think we all know, something like 90 per cent of the
companies in America are private. Companies are increasingly
staying private as long as they possibly can, as opposed to
entering the public markets. And so we saw this increasing
demand, but yet, to Bill’s point, a lack of the sort of structure
that creates the efficiency needed to be able to manage this
well.
At Hightower, we made a number of moves to bolster our abilities
there. Now we’re entering the next phase, where it’s beyond just
access to alternatives and private market opportunities. Advisors
are starting to focus more on how they can create differentiation
and be able to offer unique opportunities to their clients.
This is the next opportunity for advisory firms to really show
some ability to differentiate.
FWR: Private markets, have become very popular. What do you think
was missing, particularly in the RIA ecosystem? How are your
respective companies addressing that need, and how has your
own RIA experience informed your new role?
BC: Just by definition alternative investments were considered
peculiar. Now we’re bringing that to the mainstream, so there’s
lots of work that has to go on behind the scenes, not only
infrastructure, not only operating and administrative support,
but also education, and presentation, and ultimately reporting.
The bigger question is, what’s the appropriateness of a
particular solution, a private market solution, in an
individual’s portfolio? And today, that process is very
wholesaled. And it is leaving all the burden to the advisor to
understand their clients and then place that asset and then
administrate it.
To me, that distance has to close. If a solution is sitting in a
platform capability, it has to understand the job it can do in
the underlying portfolio, create that narrative, and then have
the workflow to go execute it so it becomes part of that client’s
financial investment portfolio. That can be achieved today with
modern technology.
BO: From like an advisor’s perspective, I think so much of the
investment side of the business has become highly commoditized.
Asset selection, asset allocation, it’s just really hard to
differentiate there. I think private markets is the next
opportunity for advisory firms to really show some ability to
differentiate and create very bespoke solutions.
Especially for the high net worth, ultra-high net worth client,
so many of them generated their wealth through either real estate
investments or single asset bets, namely their own companies.
They’re increasingly looking for exposure to the types of things
that generated their wealth in the first place. So simply buying
a very liquid alternative investment no longer is really
satisfactory for them. I think that combination is certainly
helping to fuel the increasing demand we’re seeing.
What exactly does your company do?
FWR: You’re sitting next to somebody on a plane and you’ve gotten
into a conversation. The plane is about to land, and before you
part ways, they ask “So what exactly does your company do?”
BO: We provide the ability for an individual investor to get
access to managers who invest in the private markets that
typically are only supporting large institutions. And we do that
through creating the legal structures that allow them to have
that same ability that some of the largest pensions, endowments,
and foundations would have.
BC: We’re closing the distance between that solution and the
individual portfolio that that advisor is managing, so that they
can connect in the most appropriate, most personalized kind of
educationally supported way so that a private investment
isn’t an alternative. It becomes a very well understood
capability that fits in a financial plan and the job it’s doing
within that financial plan.
It’s not different than the emergence of managed
accounts
FWR: I’d like to focus on private markets as providing
alternative investments for non-qualified retail investors,
either mass affluent or high net worth, which is where a lot of
the momentum is going.
As executives who have worked for decades with RIA advisors, what
should financial advisors be telling their clients?
BO: They should be explaining and talking about [private markets]
in the same way that they would talk about any investment for the
client, which is around risk, appropriateness, and need for
liquidity. Because these investments, in most cases, are not
highly liquid, you need to use them with the right types of
clients who have a profile that both understands it and can
sustain longer periods with no liquidity.
I think it’s very much an extension of the conversations they
have today. [Alternatives] are also not something that
necessarily everybody should be investing into.
BC: It’s not different from the managed account emergence
back in the early 2000s. Institutional asset managers were
delivering a capability that was not accessible to the retail
investor in the past, and now it was coming to market, it was
more available to more people and more portfolios. That’s the
private market story.
Beneath that investment strategies, appropriateness, liquidity
and risk all need to be understood. It’s just part of the
narrative, and advisors should be introducing it the same way
that things have been introduced to investors as they become more
and more available to the retail investor over time.
Private markets should not be a walled-off arena for just
a certain class of investors
FWR: What do you think are the major advantages of alternative
investment for investments for retail investors?
BC: Most companies and different types of investment solutions
are occurring in a private marketplace. So as the former CEO of a
public company, we transitioned that company to become private.
Why? There are benefits to it. The value that’s being created in
that business is substantial. And why should just the very few be
able to have access to that ingenuity and innovation? It should
not be a walled-off arena for just a certain class of investors.
To me, again, it’s access. Whether you’re looking at it from a
private equity standpoint, a private credit standpoint or a fund
standpoint, all of those represent opportunities that should be
considered by more and more types of investors.
BO: I completely agree. I mean, the ability to invest into great
companies at varying stages of their maturity, to Bill’s point,
should not be something that limits individual investors. I
almost don’t like the term retail, because I tend to think of
that as further down market. I’m not one that thinks these things
should be in 401K plans.
I think there are places, perhaps, these vehicles don’t need to
go, but I think individuals who understand how these things work
via their advisor should absolutely have the ability to invest
behind them.
Private investments are often illiquid, opaque, highly
leveraged and have high fees
FWR: Private markets have also been quite controversial. Critics
point out that they can be, and often are, illiquid, opaque,
highly leveraged, have high fees, and underperform public market
index funds. Could you address these concerns, and how would you
advise financial advisors themselves to address those concerns
with their clients?
BC: I would say that the infrastructure is lagging the product
and that there’s a need for more fundamental infrastructure to
deliver these types of solutions. That creates an environment
which has due diligence, which has an understanding of risk,
which has transparency that is required in a more investor-based
world that does not exist at scale or in an integrated way across
that advisory practice today. That’s a missing piece, and that’s
why I’m doing what I’m doing.
BO: Remember, this is not an either or. These private market
investments are a portion of an overall allocation, and frankly,
in most cases, are a very small piece of the allocated portfolio.
So the opportunity to take on a little bit more risk with an
opportunity to potentially generate significantly more reward,
can be appropriate depending on what the advisor and the client’s
appetite is for illiquidity over a period of time.
On average, we probably see the typical registered investment
advisory firm may have an allocation of 5, 6 or 7 per cent to
private market investments, and we think we’re going to see that
grow, but it’s still going to be the minority of the portfolio.
So I think it’s a piece of an overall strategy. And as long as
the client and the advisor are aligned around the objectives
behind it and the risks associated, I think it’s completely
appropriate.
The risk is people investing into something they don’t
really understand
FWR: Do you think that private credit and other alternative
investments should be in 401(k)s and defined benefit plans?
BO: Well, I think those are two different animals, meaning a
defined benefit plan being a pool, as opposed to a 401(k) plan,
where you have individual participants, in most cases making
investment decisions.
In my mind, it’s questionable whether [private investments]
belong in the 401(k) arena. And if it does, I think it needs to
come in conjunction with professional advisor support. Otherwise,
I think the risk is you have people investing into something they
don’t really understand.
BC: I’m in full agreement. What I’d add on the 401(k) side is
duration, or longevity, because most people are beginning to
invest in their 401(k)s in their 20s, 30s, 40s. That’s a long
time horizon. Those long time horizons are how these public and
private scenarios play out. But it requires that layer of due
diligence and professional infrastructure to make sure that the
appropriate decisions are being made.
We are in a formative stage of the industry
FWR: The Department of Labor has released its proposed rule on
“Fiduciary Duties in Selecting Designated Investment
Alternatives.” Morningstar just released their comment letter,
citing concerns including litigation risk, insufficient
guardrails and the quality of plans. Do you think they’re
legitimate concerns?
BC: I would just comment that we are in a formative stage of the
industry, and history repeats. So if you look back on the managed
account industry [when] institutional asset managers were
entering the market, the same questions were being asked around
the fiduciary ability of investment professionals, credibility
and regulatory concerns that surrounded [a new product].
What it tells you is that we’re very early stage, and that
governance, technology, infrastructure, product are all beginning
to form around an opportunity, which, if you go all the way back,
is the fact that so many companies and so many different
infrastructures are now private versus public.
This is not a tomorrow thing. It really is
now.
FWR: How do you envision the evolution of the private marketplace
over the next year to five years?
BO: Advisors are increasingly looking to allocate more, you’re
going see more RIAs, more advisors starting to look for more
sophisticated, unique offerings to get access and offer to their
clients. So I think you’re going to see growth in the allocation
and more interest in, being able to do something that’s unique to
them, as opposed to just buying something off the shelf that’s me
too, that may have additional layered fees that don’t need to be
there.
We will work in combination with Bill and his firm and the work
they are doing around infrastructure and technology. I think
those two things together will propel this to much more efficient
scale.
BC: Agreed. I think these are exciting months ahead. They’re
critical, urgent months. You have this shift in focus within the
private market space where the funds themselves are reaching for
the retail wealth market.
You have the advisory space itself saying, I want to allocate
more into interesting things. You have a technology
transformation from machine learning-based internet to artificial
intelligently scaled and capable technology.
As you put those pieces together, I really see this transforming
moment. And I think it’s now. It’s not like, you know, even in
July. It is now. And, you know, it’s fun to be in the market to
be able to build and help put these pieces together.
BO: I’ll put an exclamation point on what Bill said. It really is
now. It’s not a tomorrow thing. The conversations we’re having
every day around this shows just how exciting it is, which is
probably why you found a couple of ex-wealth management RIA guys
who have found their way into this.