Do your clients understand private markets?
There may be growing interest in private markets, but a survey by advice firm Apt Wealth Partners has found even high-net-worth (HNW) investors lack sufficient knowledge of their complexities.
The research by the Sydney and Melbourne-based advice firm said this lack of knowledge could have serious consequences in the future if clients are investing without full understanding of the risks they are taking.
Surveying 889 HNW investors, the advice firm found only 42 per cent understood how private equity works, and only 35 per cent said they would ‘strongly agree’ they understood concepts such as liquidity and exit strategies.
In June, Schroders found that HNW investors were among those driving the demand for private equity funds, as they were attracted by their higher returns and lower volatility than their listed counterparts. Likewise, research by Praemium and CoreData found 22 per cent of HNWs are already allocating to alternatives, and a further 46 per cent are considering their options and keen to invest in the next 12 months.
But while they might be interested and even allocating to the assets, Apt warned this overestimation of their knowledge could lead to HNWs exhibiting an overconfidence bias, where investors believe they are more educated than they are in reality. This could then have “costly consequences” in the event of a market downturn and could leave them feeling as though they had been misled over the intricacies of the asset.
“In periods of volatility or downturn, investors who haven’t fully understood the risks or lock-up periods associated with private equity and private credit may find themselves unable to act, leading to financial stress, unmet goals or erosion of retirement plans,” the advice firm said.
In light of this, Apt has urged financial advisers to have deeper conversations with their clients about their asset allocation and risk tolerance to ensure they are fully across the risk they are taking in their portfolios.
Andrew Dunbar, director and head of advice at Apt Wealth, said: “Advisers need to move beyond ‘tick-the-box’ education and ensure clients truly grasp what they’re invested in.
“Private equity has a place in many modern portfolios, but only when the investor understands the full picture.”
AUTHOR
Laura Dew
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