Alternative investments are widely acknowledged in our industry for their potential to provide clients with stronger returns and diversification. Despite these benefits, RIAs still find it difficult to seamlessly incorporate alternatives into their practices. That gap helps explain why ultra-high-net-worth clients hold significantly larger allocations to alternatives than the mass affluent.
Even as alternatives’ high investment minimums come down and investor demand for these assets increases, the entire experience of accessing and investing in alternatives is inefficient for financial advisors (see my previous column outlining the difficulties and cumbersome workflows in more detail).
Coordinating access to multiple alternative managers and handling multiple accounts for every client, allocating to them, can take a toll on advisory practices by bogging them down with extra, cumbersome workloads. For example, the extensive account-opening paperwork necessary for a client to invest in an alternative strategy is typically executed separately from the account-opening workflows required for traditional investments, thereby potentially doubling the effort needed to open an account that includes an alternative investment.
Our industry has attempted to make alternative investments more accessible to financial advisors and non-UHNW clients by launching products and platforms that remove the high investment minimums and some of the time-consuming workflows.
While these solutions certainly help improve and democratize access to alternative investments, they do not give advisors the flexibility and control that they need to truly harness alternatives across their books of business with the same efficiency that they associate with traditional assets. The model portfolios these platforms offer still must be held and managed separately from clients’ other accounts.
Wealthtech innovation in recent years has powered the development of scalable solutions that can remove the bifurcated experience for financial advisors with regard to alternative investments, while helping to ensure they remain in compliance:
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Centralized Trading Systems: While model portfolios allow advisors to cost-effectively manage countless accounts tied to a single model, incorporating alternative strategies into these models has been difficult due to tracking trade windows and the calculations involved with trading each individual account. For example, whenever advisors need to undertake rebalancing or raise cash across an account, they must run complex calculations to figure out which positions to buy/sell to keep the model/accounts within acceptable ranges and be accountable for any errors. When models are incorporated into centralized trading systems from a trusted third party, advisors and home offices can save themselves a lot of time and mitigate compliance risk.
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Advisor-Traded Sleeves and Unified Managed Accounts: To give advisors more control over model portfolios that incorporate alternative investment strategies, they can adopt innovative technology for trading and monitoring advisor-traded sleeves within those models. Advisor-traded sleeves enable advisors to conduct, under the same registration as the overall model, trading and execution on a pre-determined sleeve allocation with the account, so they can control cash flows and invest in other assets and strategies within the overall UMA.
Advisor-traded sleeves take unified managed accounts to the next level as far as customization and control. UMAs consolidate multiple assets, including alternative assets, into a single portfolio.
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Centralized Account Management: When all planning, processing, trading, and ongoing account monitoring for alternatives are embedded within a single technology portal, advisors and home offices can manage alternatives in their client portfolios at scale while maintaining processes designed to address applicable regulatory requirements.
Without leaving their wealthtech platforms, advisors can validate the data required for subscription documents, minimize Not In Good Order trades, and then submit and complete transactions. The unified Wealthtech ecosystems available today can also incorporate planning features into proposal documents, helping clients understand the impact of potential alternative strategies while helping to support certain compliance and sales supervisory functions to third parties.
As alternative investments continue to move downstream with lower minimums and higher demand from the mass affluent, financial advisors and their clients now have an opportunity to access limited liquidity alternative products via the same streamlined, holistic, and efficient experience they have come to expect for traditional investments.
Don’t let the opportunity pass you or your clients by.