October 16, 2023

Wealth Managers: How should you be talking about Alternatives with your clients? Part 1


I recently came across this report from LSEG Refinitiv called “Bridging the Generation Gap” and picked up on one of their main takeaways which I felt needed to be unpacked and clarified.



What was the take-away?





The report states that “Generation X and Millennials more likely to want information about crypto and other alternatives” and suggests wealth firms should customise their service and product offerings to cater to these needs by providing information and advice.


This recommendation to wealth firms is then further elaborated on as follows:


“Provide information, advice and education about cryptocurrencies, ESG investments and the full range of alternative and digital investments.” - Refinitiv


So, let’s unpack that last sentence a little and give some context:


a. Crypto: Firstly, from an investment perspective, I’d conflate crypto and digital investments into its own asset class: digital assets. Now although digital assets are unique and innovative, the regulatory framework is still nascent for most wealth managers to feel comfortable incorporating that into their product offerings, let alone give advice. It also doesn’t help that even the likes of JP Morgan Chase are banning their retail customer from making crypto currency payments* and monthly exchange volumes are a fraction of their heydays in 2021.




b. ESG ESG is simply a different lens to analyse an investment. From my conversations with wealth firms across the world, most have acknowledged this is an area of focus, although as some of our previous blogs indicate, this topic is also multi-faceted: Understanding ESG Ratings 101 & Does a High ESG Rating Mean Ethical Investing? and https://www.illio.com/blog/does-a-high-esg-rating-mean-ethical-investing


 c. Alternatives: It is this part which needs further analysis. Suggesting that there is an information gap around the full range of alternatives (which given above would mean Private companies, Hedge fund investing and arguably Real Estate) is not quite true. For the past 20 years, clients have been able to access and be advised on alternatives through their wealth managers as it has been a decent part of their historical allocations.


So, what’s the data telling us?


In my opinion, the data is the right data, but the recommendations made need contextualizing. Millennials and Gen X do want to talk about Alternatives but if they were HNWI, then they should have many channels to access that information. However, if they are in the Mass Affluent space, then the traditional variants of Alternatives, with their high minimums, will be out of reach because of liquidity constraints. However, they could be looking at fractionalized alternatives as part of their investment strategy because that doesn’t require millions of dollars in total AUM, but this poses a different challenge to wealth managers.




How big is the fractionalized alternatives pie?


There are already millions of individual investors who are accessing alternative assets such as venture capital, private debt, private equity, real estate and real assets such as wine, collectables and natural resources.




However, I think it is unlikely that wealth managers will be advising or even holding custody of fractionalized alternatives anytime soon.  It’s hard enough doing the right due diligence on an individual corporate bond, a small cap listed stock or a real estate fund; it would be a big project to do the same for their unlisted equivalents and expect the same access to information.



So how to help a client who wants to talk about alternatives?


Despite not being able to offer fractionalized alternatives to their clients, there is an opportunity for wealth managers to support their clients by thinking strategically and build trust. This should directly affect retention and indirectly help boost AUM. It allows the wealth firms to showcase their strengths around overall portfolio management and support their clients to hit their overall goals and targets, rather than looking at each element independently.


So, if a Millennial/Gen X client wants to talk about alternatives and they don’t have the liquidity to buy traditional alternatives, then the wealth manager can add value by:


  1. Showing them how HNWI/UHNWI and family offices typically allocate their overall portfolio to alternatives (~13%) and real estate (~15%)
  2. Help them understand how the various sub-sectors of alternatives map to their fractionalized alternative equivalents
  3. Create a shadow portfolio which helps them assess their private assets from an allocation, performance and risk perspective and show them what their total wealth looks like when combined with what they have with the wealth manager


In conclusion, the Refinitiv’s research brought to light some interesting data, but the conclusions ask more questions than they answer. The world of investments will always see changes and despite the growth of retail investing, there are endless opportunities for wealth managers to bring assets they aren’t managing themselves, into a helpful and supportive conversation. In Part 2 of this article, I will show how that conversation could look like.



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