Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
In the last two years, financial advisors have faced an array of challenging market conditions: high inflation, rising interest rates, market volatility, recession concerns, a rocky bond market and geopolitical instability. With pressures to deliver the long-term returns and yield that their clients have come to expect, financial advisors are looking for ways to reposition traditional 60/40 listed equities and fixed income portfolios. But without education on how to implement an allocation to private markets investments, many advisors are waiting on the sidelines despite the clear benefits of allocating.
Why aren’t more advisors taking advantage of them?
Private markets have historically been an institutional asset class. Pension funds, insurance companies, sovereign wealth funds, and foundations and endowments have relied on sizable private asset class allocations for several decades. These investors need steady, reliable returns over the long term, and by and large, private markets have delivered regardless of short-term market fluctuations or economic cycles. But retail private wealth has allocated 2% (or even less) to alternatives traditionally. With investors looking for new areas in which to invest and innovation in product structures, there is now increasing sentiment and opportunity for that allocation to rise. Private-wealth investors are beginning to realize alternative sources of steady returns are available to them and can be a desirable way to provide resilience to their clients’ portfolios.
Despite some familiarity with private markets, many advisors and high net worth investors continue to have misconceptions about the asset class. Private investments are thought to have been difficult to access for anyone but large institutional investors. And many of these investments have historically had a high minimum investment associated with them. While this has traditionally not been a barrier for institutional investors, a $10 million commitment is prohibitively large for private-wealth investors. Older structures also required investors to remain committed to an investment for eight to 10 years. But many of those these barriers are being overcome with creative new structures and innovative features for private-wealth investors, which underscores the ongoing need for alternatives education.
Let’s revisit three misconceptions and identify how advisors can understand the asset class well enough to explain it to their clients.
-
Alternatives are difficult to access. Today, access to institutional-quality private market investment managers and vehicles across real assets, private equity, real estate and private credit is widely available through financial advisors.
-
High minimums disqualify clients from investing. In truth, technology and regulatory changes are expanding access for Private Wealth investors to invest in private market solutions, at ever-shrinking minimums.
-
Alternatives are relatively illiquid. New structures have come to market that allow private-wealth investors the option of some periodic liquidity to address significant life events, depending on their overall portfolio needs.
What educational resources are available?
Many asset managers and industry organizations offer general education on the asset class – a Private Markets 101. But I see the need for education on implementation and portfolio construction – the “how.” How do advisors construct a portfolio incorporating private markets? How does one strategy complement other exposures? How do private markets fit alongside traditional equities and fixed income? How do advisors execute capital calls, distributions, and communicate performance to clients over the life of the investment in an efficient manner?
At Macquarie Asset Management, we have invested in developing educational resources specific to the asset classes where we are experts, like infrastructure. For example, Macquarie’s Sharpe Advisor offers practical education on private market concepts, asset classes and product structures for advisors. We and other asset managers have also worked with industry organizations like the Chartered Alternative Investment Analyst Association (CAIA) and the Investments and Wealth Institute (IWI) to develop educational programs and certification courses on how to incorporate private market products across asset classes.
The asset management industry recognizes the opportunity to reach more advisors and have private markets be part of a well-balanced portfolio. To do that, we must serve as a resource and continue to develop educational materials that meet advisors’ evolving needs. Exposure to today’s vast private markets can add improved returns, help protect from downside risk and volatility through portfolio diversification, and hedge against medium-term inflation. Overcoming the education gap is the key to helping financial professionals feel more confident in constructing portfolios that include private-market allocations for their private-wealth clients.
Andrea Mody is U.S. wealth private market head at Macquarie Asset Management.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our YouTube channel.
More Volatility/Downside Protection Topics >
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.