Simple is sweeter when targeting alts to wealth managers

With wealth managers having minimal research time, a BNY report has found simple alternatives strategies are those which resonate best with that audience. 

The report Wealth Trends in Alternatives surveyed 100 US wealth managers, and found 83 per cent expect their allocations to alternatives will be higher or significantly higher in a year. 

In Australia, research by Adviser Ratings found private equity drew the largest inflows in 2024 from Australian advisers at $927 million followed by commodities at $376 million while advisers will typically hold a 19 per cent allocation to the asset class in their portfolios.  

But when it comes to enacting that in their asset allocation, over three-quarters of respondents told BNY that they spend six hours or less screening, researching and learning about alternative funds. As well as their own research, they are also utilising third-party investment consultants, internal investment staff, and alternative access platforms to conduct this while Australian advisers have also detailed to Money Management their reliance on business development managers and investment specialists.

Some 44 per cent agree it is harder to research alternative funds than other traditional investments, and 51 per cent said legal or compliance matters are harder to work through on alternative investments. 

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BNY said: “Wealth managers’ capacity to undertake complex, time-consuming research is limited – particularly when it comes to alts research and manager selection.

“This is an indication that simple and straightforward strategies may have the most success with private clients. The wealth manager must first understand the investment benefits of the strategy in order to explain those benefits to their private clients. Therefore, the easier the strategy is to understand, the more efficient it can be to inspire private clients to invest.”

When selecting a fund, liquidity is seen as a top three criteria for investors, cited by 58 per cent of respondents, alongside investment strategy and tax consideration. 

This echoes comments by Federation Asset Management that stated it has found investors are willing to forsake higher returns in exchange for greater liquidity in their fund. Federation’s Alternative Fund II has quarterly redemptions, and head of distribution Cameron Farrar said this had been enacted based on adviser feedback.

“The liquidity function is rarely used, but they are still willing to give up 120–150 bps per annum to have that option available,” he said at Momentum Media's Wealth Management Summit last month.

BNY found wealth managers are also most likely to choose a fund from large traditional manager that is adding an alternative product to their existing investment range rather than a boutique manager. Some 83 per cent said they would opt for a large traditional manager compared to only 38 per cent who would use a boutique manager, even if they are a well-known company. They were also narrowly more likely to choose a large traditional manager over a dedicated alternative specialist (79 per cent). 

“Respondents highlighted that big brand names are viewed as particularly valuable, suggesting that reputation, broader experience and trusted, established relationships are key factors in decision-making. In addition, more than half of wealth managers surveyed lean towards asset management firms with a historical focus on retail investors, further emphasising the growing demand for alts among private clients and the steps asset management firms take to meet that demand.

Having a robust selection of asset managers to choose from is seen as one of the biggest hurdles when it comes to their fund selection, cited by 27.6 per cent of respondents.  A greater range of managers would allow them to build a better peer group for fund comparison, they said, and they spend between three and six days trying to resolve the problem.

“The fact that this is a primary challenge for wealth managers, though they most often use internal resources to evaluate alts managers, indicates that internal staff may either be lacking the expertise or time to build and monitor alts peer groups – a process that requires deep analysis across a number of strategies and often takes weeks to complete," BNY said.

“In the case of manager selection, it may be that some respondents aren’t spending significant time on this function because they outsource it to third-party firms that have built peer groups and provide advisory services. But it may also suggest a new learning curve in the industry as access to alts expands for a broader set of investors or that alternative strategies and how they are used could benefit from a more straightforward approach to marketing their strategies to be simple enough to articulate to clients.”