Bridging the gap as HNW clients seek alternatives

praemium Alternatives high net wealth investors asset allocation financial advice Premium Content

3 June 2024
| By Laura Dew |
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Advisers and platforms have a role to play in supporting their clients with alternative investments, according to Praemium, as research finds alternative assets are set to reach $21 trillion next year.

The platform has been working in conjunction with research house CoreData in a three-year research partnership, announced last November, and is producing a series of quarterly reports. The latest one Accessing Alternative Opportunities examines how high-net-worth (HNW) investors are leading the charge towards alternative investment assets.

According to the PwC, alternative assets are set to reach US$21.2 trillion ($31.9 trillion) by 2025 when they will account for 15 per cent of total global assets under management. 

The Praemium report said this presents an opportunity for advisers with some 17 per cent of HNW investors already investing in the asset class and half of these saying they already have an ongoing relationship with an adviser. This is because alternatives showcase a willingness by the investor to take calculated risks and necessitate a deeper understanding of the asset class and market dynamics.

“This surge in alternative investment allocation presents a ripe opportunity for advisers to elevate their service offerings and deliver tailored investment solutions that resonate with HNW investors’ preferences and objectives,” it said.

“Being more knowledgeable enables HNW alternative investors to not only make informed decisions and actively participate in shaping their investment strategies, but fosters a sense of empowerment and satisfaction among investors, leading to a more collaborative relationship with their wealth adviser.”

Role for advisers

Speaking to Money Management, Denis Orrock, chief strategy officer at Praemium, discussed the relationship between the client and their adviser. Alternatives tend to be more suitable for those HNW clients in a growth strategy, not those who are in a defensive or income-seeking portfolio or who are approaching income drawdown in retirement.

The growth in alternative products may have “snuck up” on advisers over the past few years, meaning they may be less aware of all the new, available products out there in areas such as venture capital, private debt, and infrastructure.

In many cases, he said, it is actually the client who is suggesting an alternative investment to their adviser first.

“These HNW clients are actively out there already looking at this so an opportunity exists for advisers to look at alternatives and bridge that gap. Investors have an appetite for them but the challenge is how does the adviser educate them, educate themselves and how do they then manage these assets?” he said.

“The client may hear about it at a BBQ or at the golf club but the adviser needs to be alert of what products are out there and give objective advice about whether it would be suitable for that client. They need to explain the risks and the liquidity challenges and what it would mean for their portfolio.”

However, this also presents a positive opportunity for advisers to “upskill” the investments they are able to discuss and demonstrate that advanced knowledge to their clients. 

“This presents an opportunity for advisers to upskill and broaden their investment universe. It’s good to see clients are taking these ideas to their adviser but some clients might need a ‘sanity check’ with some products they suggest and it is up to the adviser to filter out the noise and ensure that the client understands” he said.

This is ever more necessary as alternatives continue to grow and assets that may be classed as ‘exotic’ currently such as cryptocurrency enter the mainstream.

“It depends on how you classify as an alternative, it’s such a broad church and that’s one of the challenges for the industry to work out how that definition is going to grow. Certainly, private credit and private debt, commercial real estate, some of the metal and rare earth funds, the industry is working to ascertain what is classed as an ‘alternative’,” he said.

“It’s the cascading effect, these type of assets used to be for the family offices and the UHNW but as they’ve become more common and mainstream, it cascades across the industry.”

To assist with this, multiple providers both new and existing are already offering educational work or seminars on the asset class, aware of its newness and complexity in the investment world. 

How can platforms help?

From a platform perspective, Praemium enables advisers to strengthen their value proposition by offering a wide range of investment options, including alternatives such as infrastructure and private credit. Some $5.7 billion of funds under administration are already held in alternatives across more than 19,000 investors. 

The role for platforms in this space, Orrock said, will be to provide access to advisers, administering and processing them, working out how to deal with liquidity challenges, and how to do all of this in a way that is smooth and accessible for advisers. 

“These type of assets might have a capital lock-up or capital call attached so it’s important to have a good platform administration partner,” Orrock said.

“The Powerwrap platform and our heritage there has a long history of handling complicated and unusual assets through our custodial and non-custodial capability. But over the last 18 months, we’ve seen this demand grow and we are investing a lot of time in those assets and making continual improvements.

“We have a market-leading capability and want to continue to build on that around the alternatives space. Our ability to hold assets and administer them from a non-custodial standpoint is a significant feature of the platform versus some others which are more constrained.”

With central banks set to embark on monetary tightening this year, Orrock said the opportunity for alternatives shines bright into the future.

“People are always looking for new sources of returns and you can argue that will be the case even more when rates are lower. There is an expectation among high-net-worth clients that their portfolio will be invested in something that can deliver them a high source of alpha and alternatives offer that as an asset class,” Orrock said. 

“Clients are becoming more comfortable with them and the potential risk they carry and more comfortable with holding an investment for a five to seven-year time horizon.” 

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