The “democratization of alternatives” process playing out in the wealth management space in recent years is deepening, with more advisors shifting from education to implementation, according to a new study commissioned by alternative asset manager Brookfield.
“We are seeing a significant shift in how advisors approach alternatives,” John Sweeney, CEO of Brookfield’s private wealth business, said in a statement. “As familiarity with the asset class has grown, the conversation has evolved from understanding what alternatives are to understanding how they can be used within a portfolio to help achieve specific client objectives. That evolution is helping advisors build deeper expertise, integrate alternatives more thoughtfully into portfolios and ultimately deliver better outcomes for clients.”
The study found that the number of North American advisors self-reporting “deep alts knowledge” nearly doubled to 34% from the previous survey (18%), released two years ago. In addition, the advisors reported more varied goals for using alts, leading to allocations to a wider variety of funds. Overall, more than half of wealth manager respondents use more than five alternatives products, and a similar percentage recommend using more than five alternative asset managers.
In the U.S., the study found that advisors using alts had an average allocation of 13% of assets under management. Overall, U.S. wealth managers said 44% of their high net worth clients are invested in alts. Advisors said for an additional 27%, they will recommend the use of alts in the next two years while for 29% they will not recommend them within two years. Those percentages slightly lag the numbers from other countries.
Wealth managers cite a client’s risk tolerance (72%) as the most important factor in determining optimal alts allocations. That is followed by investment goals (65%) and cash/liquidity needs (47%).
In terms of obstacles, 50% of respondents said the most popular sticking point is clients are worried about redemption limits and liquidity constraints. That was closely followed by lack of client knowledge (46%) and suitability (44%).
Still, the study found that appetite for evergreen funds remains strong, even amid the current spike in redemptions that has hit private credit business development companies and interval funds.
On the topic of portfolio construction, 67% of respondents have a general strategic asset allocation to alts, along with a discretionary/tactical sleeve. A minority report a mostly (16%) or fully (8%) unconstrained approach.
In addition, few advisors currently use a holistic single-fund allocation approach (9%) compared with a multi-asset alternatives sleeve (27%), multiple individual investments (21%), or a mix of all of those approaches (43%).
The report also identified a cohort of advisors it dubbed “power users,” which it defined as advisors who report deep knowledge across alts asset classes and vehicles, recommend greater diversification by asset class and vehicle, more frequently expand beyond initial allocations, have private assets integrated into portfolio management processes, demand higher return premiums from less liquid vehicles, view alts as a core aspect of high-net-worth portfolios and consider alts expertise a “must have” for advisors. In all, it found 28% of surveyed U.S. advisors qualify as power users.
The report found that while all wealth managers expect an illiquidity premium, power users generally expect a greater one. Over 55% of advisors expect a premium of 200 basis points or more, while the figure for power users was 68%.
The study was conducted by independent research organization CoreData, which surveyed more than 600 financial advisors with an average practice AUM of $657 million and 60 gatekeepers responsible for evaluating alternative asset managers and products for firm platforms in the U.S., Canada, the U.K. and Switzerland. One-third of the respondents were U.S.-based advisors, with 57% based at wirehouses and 43% at RIAs.
