While the world has witnessed the mainstreaming of alternative investments in recent years, financial advisors are still lacking the proper tools to navigate the marketplace.
Family offices are allocating over 50% of their assets to alternatives, yet, at most, individual investors are 5% allocated to alternative investments. Additionally, investment in alternative assets is expected to grow from $13.9 trillion in 2020 to $21.1 trillion in 2025. However, I don’t think advisors are remotely close to being able to support this growth.
Knowing your customer
From my experience as an investor, I’ve witnessed the majority of advisors lack the tools to truly understand the full breadth of my portfolio. In the securities space, this is referred to as ‘knowing your customer.’
When an advisor makes a recommendation, they should have a good sense for each client’s unique situation, including: spending habits, current and future family status, income, risk profile, and their other investments, including alternatives.
Given alternatives’ fragmented nature, the data lives in many different portals (if any), in different formats. Because of this, financial advisors often say something along the lines of,
“If the investment doesn’t live in our existing platform, then we can’t track it.”
This isn’t out of laziness or a desire to not truly know their client, it’s that tech hadn’t yet solved the problem for them.
The future of alternative investments
One of two things will happen over the coming years:
- Individual investors will remain under allocated to alternative investments, despite the benefits they offer to risk-adjusted returns, because their advisors cannot keep up and adequately assist them with nuances such as collecting K1s, managing capital calls, understanding performance (which requires processing many statements manually), and more challenges.
- Financial advisors who adapt, and offer the ability to “keep up” with their clients as they invest in alts, and even further their ability to access alts and improve their risk-adjusted returns, will win big. These advisors will have additional ways to differentiate with wealthier clients, and improve client satisfaction and retention.
If your advisor isn’t currently keeping up with your alternatives, give them the tools to do so by inviting them to access your account.
This way, your advisor can stay up-to-date on your alternatives’ performance, easily track all your important documents and K1s, and help you make better investment decisions for the future.