How Wealthtech Streamlines Alternative Investments
The demand for alternative investments continues to rise, prompting financial advisors to expand the products and strategies available to their clients. However, despite the diversification and risk-managed returns they can provide, the experience of accessing and investing in alternatives, from onboarding and account-opening to integration into portfolios, is a time-consuming one.
As it stands now, the amount of account-opening paperwork required for a client to invest in an alternative strategy is so cumbersome that it must be executed separately from regular account-opening workflows. A process that requires separate, lengthy paperwork, apart from all other business conducted with the same client, elevates the risk of potential errors as well as investment and allocation delays.
This added work comes from the difference in suitability requirements from client to client, and from alternative manager to alternative manager. The requirements for proving accredited investor status can also differ among managers. Maintaining access to three or four alternative asset managers, and then having to manage three to four different accounts for every client who allocates to them, can take a toll on advisory practice workflows.
The lengthier workflow for alternative investments can often lead to other inefficiencies, which make it difficult for advisors to deliver the potential benefits of alternatives within a holistic wealth management offering.
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Longer Trading Windows for Illiquid Investments: The illiquid nature of many alternative investments, along with the lengthy paperwork and separate workflows that go along with accessing them, often leads to longer trading windows compared to traditional investments. For example, if a client adds $100 million to an account comprised of 80% mutual fund individual securities and 20% alternative investments, the trade window for allocating to the alternatives may take one to two months, which poses a problem for the advisor and the client.
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Separate Reporting: The additional paperwork and standalone account-opening and allocation processes make it much more difficult for advisors to include alternative investment performance in client-facing reports.
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Lack of Education Among Investors: While advisors have been able to take advantage of new platforms, which are helping to streamline workflows related to alternative investments, and therefore “democratize” access to these assets and strategies, this can present a problem at the investor level. The non-institutional, retail investors who can suddenly access alternatives which were historically unavailable to them may not fully understand what they are, how they function and the role they can play in a diversified portfolio.
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Concerns Among Enterprises: Enterprises often find it much more difficult to incorporate alternatives into their practices than independent RIAs. For enterprises, access to alternatives for their clients can make them anxious, because they are concerned all the affiliated advisors under their umbrellas may not have adequate transparency into the alternative managers whose strategies are available to their clients. Enterprises are also understandably worried about all their affiliated advisors remaining in compliance and properly managing accounts when it comes to alternatives.
How Wealthtech Can Create a Frictionless Alternative Investing Experience
Fortunately for financial advisors, there are innovative wealthtech solutions in the marketplace that they can harness to simplify and streamline access to, and investment in, alternatives.
Account-opening, performance reporting and portfolio construction that can be executed within a single chassis, provided by an intermediary that also helps support select compliance tasks and offers interactive educational resources for investors, can remove many of the challenges associated with alternatives for independent RIAs—and enable them to offer alternatives to more clients at scale. Depending on the instrument, the level of technology-enabled governance can range from point-and-click access for interval funds to more structured process for tender offers and private business development companies, and extend to more traditional private placements. In each case, the right technology solutions can streamline workflows, improve oversight and reduce operational friction for advisors.
With separately managed accounts becoming mainstream, advisors can now tailor tax-efficient alternatives for investors, and seamlessly access these strategies in ways previously unimaginable.
Ironically, as easy as it is to incorporate SMAs into advisory practices today, they used to present the same workflow and portfolio construction difficulties as alternative investments. Innovative technology solutions which brought advisors and SMA managers closer together, and removed frictions, have made a world of difference.
By working with a wealthtech provider that enables advisors to manage alternative investments in the same way as traditional investments, and do so within a single ecosystem, advisors can optimize the value of alternatives for clients, and do so at scale as their businesses grow.