Untapped potential: alternative investments and the wealth management channel

Fund managers are looking beyond institutional investors to expand their LP base, but tapping into the wealth management channel requires a strategic approach, tailored to financial advisor needs.

Alternative investments present wealth managers with a significant opportunity to produce better investment outcomes for their clients. Despite the potential benefits, individual investors are poorly represented in the alternative investment capital base. As noted by Bain & Company, individual investors held roughly half of global wealth ($140–150tn) in 2022, with a nearly equal amount being held and managed by institutional investors ($135–145tn). For individual investors, however, alternative investment strategies account for a very small percentage of their investable assets (estimated at less than 5%).

This presents a significant opportunity for both financial advisors and alternative fund managers. However, fund managers face substantial headwinds when it comes to accessing the fragmented wealth management channel, given unique educational and coverage considerations.

Cerulli estimates that in 2021, approximately 288,000 segmented financial advisors oversaw $30.7tn in individual investor assets. While the sheer size of this market is compelling, fragmentation in the channel makes it difficult for fund managers to reach this considerable investor base and limits access to this important asset class. 

Education and asset allocation considerations
In an asset class where manager and strategy selection are paramount, financial advisors need quality educational content to make smart, strategic decisions for their clients. Empowering financial advisors with both foundational and fund specific educational resources is a prerequisite for fund managers to successfully cover this channel. 

In addition, understanding how financial advisors think about asset allocation will help fund managers communicate the value proposition of their alternative investment strategies. Over the past year, the focus on meaningful diversification has increased dramatically.

Financial advisors are increasingly seeking uncorrelated sources of return to mitigate risk in their clients’ traditional stock/bond portfolios. Fund managers should ensure their strategies serve these investment goals and portfolio use cases can be explained to clients.

Coverage considerations for fund managers
Fund managers should be mindful of the distinct attributes of the individual investor client base when developing a distribution and coverage strategy. Some areas to consider include:

• Channel access: Technology-enabled platforms have made it possible to aggregate individual investor commitments into feeder funds at lower minimums. This allows managers to access a larger segment of the wealth management channel, while effectively only dealing with a single entity, just as they would a typical institutional investor. However, fund managers should plan for additional time for fundraising given the lower investment minimums and time needed to develop financial advisor understanding.
   
• Sales coverage: For institutional investors, fund managers can provide customized pitch books, arrange one-on-one meetings, and spend hours handling follow-up calls. But this model is not scalable in the fragmented wealth management channel. Financial advisors need knowledgeable alternatives specialists who can explain alternatives strategies and how they fit within a portfolio. Managers should assess whether their current teams have this capacity and consider building a dedicated sales force or engage with an alternative asset distribution team.
   
• Due diligence: Unlike institutional investors, many individual investors require support in conducting investment and operational due diligence when assessing alternative investments. Fund managers should ensure potential investors understand the strategies they are considering. Financial advisors play a key role in helping clients achieve a comprehensive understanding of alternative investment strategies, and how a particular offering will impact their overall investment portfolios.

Operational and infrastructure considerations
In addition to developing a strategic education and coverage approach, fund managers should consider how to integrate into the financial advisors’ operating ecosystem. Technology-enabled platforms offer automated and simplified processes financial advisors have come to expect. These include streamlined subscription and redemption functionality, dashboards that provide performance, capital call, and cashflow information, and automated tax reporting. Partnering with a technology-enabled platform allows fund managers to seamlessly integrate, and scale operations and distribution, within the wealth management channel.

Conclusion
The wealth management channel represents a multi-trillion dollar opportunity set but requires a strategy that addresses the unique needs of financial advisors and their clients. Technology-enabled platforms connect fund managers and financial advisors with automated end-to-end alternative investment solutions, allowing both parties to better achieve their goals and objectives. 

About
Lawrence Calcano is Chairman and CEO of iCapital. He began advising and working with iCapital shortly after its 2013 founding, leading key strategic and business development initiatives, before joining full time as CEO in early 2014. Since then, he has led the rapid growth of iCapital – both organic and through acquisition – building it into a leading global fintech company. Prior to iCapital, Lawrence was a Partner and Managing Director at Goldman, Sachs & Co., where his last role was Co-Head of the Global Technology Banking Group, part of the Investment Banking division.