New technology opens up the market to those who want to distribute and buy alternative investment products. The author of this article, at a US wealth management group, talks about the evolution of the market and what the future holds.
The following guest article comes from Steven Brod, the CEO
and chief investment officer of Crystal
Capital Partners, a Registered Investment Advisor in the US.
The editors are pleased to share these views; the usual
disclaimers apply to the views of guest writers. Email tom.burroughes@wealthbriefing.com
The landscape of investment platforms has witnessed the emergence
of a new player in recent years – alternative investment
platforms. As financial advisors strive to attract the best
clients, it is crucial for them to grasp the fundamental aspects
of these platforms. While non-traditional asset-focused
investment platforms have existed for some time, the
technological advancements surrounding alternative investment
platforms have made this type of investment more accessible to a
wider range of investors.
Initially, alternative investment platforms gained traction in
the early 2000s due to heightened demand from institutional
investors seeking alternative investments. However, today, these
platforms are increasingly popular among retail investors,
including both accredited investors and qualified purchasers. The
allure lies in their potential for higher risk-adjusted returns
and lower correlation to traditional investments. As an alts
platform provider, our firm has witnessed the creation of 80 new
client portfolios in 2022 alone, representing a growth of 21.3
per cent, year-on-year.
With a multitude of alternative investment platforms available,
it is imperative for wealth managers to understand which
platforms offer suitable structures. Additionally, they should
consider key differentiators such as the platform”s alternative
investment offerings, service provisions, and ownership
structure. As each platform caters to different types of clients,
wealth managers must explore their options thoroughly before
making a decision. The categorization of investments, the level
of service provided, and the ownership interests of the platforms
should all factor into their choice.
Categorization of alternatives: Product offering and
investor type
With more than $13 trillion in assets in alternative investments
at the end of 2021, and AuM in global alts expected to grow to
$23.21 trillion by 2026 according to market research firm
Preqin, wealth managers
must first comprehend the various types of investments offered
within the alternative investment platform ecosystem. Some
platforms aim to provide a well-balanced selection of multiple
alternative investment strategies, while others follow specific
mandates or selection criteria, leading to diverse product scopes
and profiles.
Structures available: Accredited investors vs qualified
purchasers
Given the varying wealth statuses of investors, alternative
investment platforms can provide access to a wide range of
investment funds and structures tailored to different
SEC-designated client types. It is crucial for advisors and
investors to understand the specific client types each platform
caters to. For instance, platforms built for qualified purchasers
(QPs) exclusively offer access to underlying funds and investment
structures that can legally accept only QP investors.
While all platforms strive to democratize the space by reducing
investment minimums for end clients, the fund minimums required
for QP-facing funds are often higher than those for accredited
investor-facing funds. Consequently, QP funds are designed to
serve ultra-high net worth and institutional investors
exclusively. This distinction ensures that investors
participating in QP investment structures meet the SEC’s criteria
and possess the financial sophistication necessary to make
informed investment decisions.
Degrees of service: Full suite service vs
access
The primary service offered by all alternative investment
platforms is access to alternative investments. These platforms
democratize access to a variety of opportunities that may have
otherwise been inaccessible. Access may include private credit,
private equity, venture capital, real estate, hedge funds, and
more.
Unlike traditional investment portfolios consisting of stocks and
bonds, alternative investment portfolios require extensive
services beyond the point of investment. While institutions such
as endowments possess robust operational infrastructures capable
of managing the administrative burdens and varying liquidity
schedules of multiple alternative investments, most advisors
struggle with this operational burden. In a survey taken by my
firm, 80 per cent of respondents among our clients said
investment support beyond the point of sale is of interest to
them, when considering an alts platform. Although digitization
has advanced significantly, certain platforms specialize in
specific niches across the services spectrum, while others aim to
provide comprehensive coverage. These services can range from
consolidation and liquidity management to client education and
business development support.
Ownership interests of alternative investment platforms:
Privately owned vs private equity/venture
capital-backed
Wealth managers and underlying clients must understand the
ownership interests associated with the alternative investment
platforms they choose to associate with. The rapid growth of the
alternative investment platform ecosystem has attracted interest
from asset managers worldwide seeking to capitalize on this
expanding segment.
Conflicts of interest
To avoid potential pitfalls that could harm advisors and their
clients, firms should align themselves with platforms that
guarantee a conflict-free manager selection process. Transparency
in fund selection is crucial due to the substantial influx of
private capital funding into the sector. A fully-vetted platform
that prioritizes product distribution based on the merits of the
fund’s investment strategy, rather than distribution for payment,
ensures the elimination of conflicts.
Alignment of interest
To foster a direct alignment of interest among the fund manager,
platform, and end investor, advisors should seek platforms that
invest in the products they distribute. Similarly, platforms
should distribute products in which the manager has made
significant internal capital commitments. Wealth managers should
also consider platforms where the platform capital is contributed
to the funds on the roster.
Key considerations
The alternative investments industry has been, is, and will
continue to evolve to meet the growing appetites and needs of
clients. While a plethora of solutions are available, advisors
must comprehend the nuances associated with each platform to
ensure that their clients’ needs are adequately met. Advisors
venturing into alternative investments must recognize that these
non-traditional investments represent a long-term journey,
requiring infrastructure beyond the point of sale to ensure
efficient outcomes. Ultimately, the quintessential factors are
the alignment of interests and platform transparency.
About the firm
Crystal’s selection of funds is used by 200 advisory firms
representing 450 client portfolios. Based in Miami, Florida,
Crystal Capital Partners’ clients include independent advisors,
regional banks, IBDs, and multi-family offices. Crystal is a
Registered Investment Advisor.