Retail investors get the importance of alts. Can they get the same access as institutions?
As retail investors and their advisors gravitate toward the alternatives space in search of diversification and better returns, they are encountering formidable barriers to entry. Compounding this issue is a “one and done” mindset of the typical retail client who, having invested in a single alternative investment – usually a REIT – tick the “diversification” box on their portfolio checklist.
This scenario does not represent the most productive investment approach. With alts transactions falling outside the standard investing framework and the ongoing difficulties advisors have in leveraging the wide-ranging alts universe efficiently, it’s not a surprise, either. Providing advisors with an efficient platform offering a wide array of both traditional and alternative investments is the key that will open the alts gates to retail investors, allowing them the opportunity to invest in the asset class with the same as institutions have for decades.
John Guthery is chief investment officer at FusionIQ, a leader in the delivery of cloud-based wealth management solutions, where he focuses on developing advisor platforms and business lines. We caught up with him to discuss the challenges today’s retail investors and advisors face in leveraging the expansive alts universe, and how FusionIQ’s innovative digital alternatives platform helps advisors deliver a seamless experience to clients.
Alternatives Watch: Currently, how does FusionIQ accommodate alternative investments on its various platforms? What alts-related solutions and services does your platform offer to wealth management firms and their financial advisors? And how can alts managers get onto your platform in the first place?
John Guthery: FusionIQ provides a gateway to alternatives through our Digital Model Marketplace and finTAMP modules in our all-in-one wealth management platform FusionIQ One. Our approach is broad, incorporating diverse alternative asset classes across the investment spectrum. As an example, through our relationship with Galaxy Plus, we will be providing access to over 40 hedge funds and CTAs in the 3rd quarter. We also embrace all forms of liquid and semi-liquid alternatives, from model strategists who employ non-traditional strategies to help limit market volatility to interval funds that fit well on our platform and provide access to institutional real estate, middle market credit and other alternative strategies. Our next step is offering solutions in the private markets arena, including private equity, private debt, direct SPVs and private real estate. We deliver these strategies in conjunction with several key family office and industry partners.
FusionIQ believes that retail investors have been forced to handle alternatives as a one-off trade that sits next to the holistic portfolio. Retail investors also tend to look to a single alternative strategy to diversify their portfolio. They use REITs and call that their alternatives allocation. Or it may be middle market credit. The goal of the FusionIQ One alternatives platform is to provide advisors the opportunity to allocate for retail investors the way institutional investors allocate for their portfolios. Institutional investors scan the entire universe of alternatives looking for the best opportunities. They consider the whole portfolio and how a particular asset impacts and enhances the overall risk return characteristics. In other words, they focus as much on how to best implement alternatives as they do which alternative strategy to buy. The FusionIQ One platform not only provides high-quality products but offers the breadth and efficiency retail investors need to, with the help of their advisors, invest like institutions by combining public investments and alternative investments on one transaction platform.
Alternatives Watch: Why do so many digital asset management platforms for retail wealth management businesses find it challenging to seamlessly incorporate alternative investments into their various workflows, including due diligence, consolidated financial reporting and account opening?
Guthery: A primary issue wealth management platforms face is that alternatives are not, contrary to what many in our industry believe, an asset class in the usual sense of the term.
Rather, alts encompass a broad range of investments loosely connected by the fact they do not fit neatly into a single category. This means every platform must determine its own definition of “alternatives,” ideally in ways that align directly with the needs of their target markets.
The independent broker-dealer use case for alternatives is different than a small RIA, which is often different from what a large RIAs needs are, and so forth.
Integrating digital asset management into an all-in-one wealth management platform delivers to financial advisors the flexibility to design their alts allocations to meet their primary market’s needs. At the same time, they get to retain the ability to service clients more broadly.
A second reason digital asset management platforms face challenges is the difficulty of incorporating alternatives seamlessly into client portfolios. Engaging with alts requires business, compliance and technical expertise across multiple functionalities.
Alternatives Watch: What are the top three attributes in a digital asset management platform that wealth management firms and their financial advisors should be looking for if they want to offer alternative investments – from private equity and hedge funds to private credit and real estate – to their retail investor clients?
Guthery: The top three attributes that an effective alternatives platform should offer include the ability to seamlessly incorporate alternatives into a broadly diversified portfolio, an enhanced advisor and client experience and the right expertise.
First, effective alternatives platforms acknowledge that the whole portfolio is important, and this is best delivered by integrating alternatives into a unified wealth management platform. This platform should allow for seamless integration of a wide range of alternatives with traditional investments so that advisors can work to enhance the client’s overall risk-return efficiency, not just provide access to an individual product.
Second, alternatives should focus on the advisor and client experience while using the platform. Beyond aggregation and viewing, an effective alternatives platform should focus on the advisor and client experience while using the platform, including ease of use when transacting.
Finally, advisors and investors should make sure the platform team has appropriate expertise. Much of my career was spent at a large broker-dealer where I oversaw research, due diligence, and design of a $10 billion alternative investments platform. I also constructed and managed alternative investment product on the investment management side of the business. But product knowledge is not enough. To build a great alternatives platform, you need equal or greater expertise across the platform’s functionality, encompassing regulations, custody, administrators, technology, pricing and more.
Alternatives Watch: How can institutional alts managers seeking to align their solutions with a retail wealth management audience most effectively partner with digital platforms such as FusionIQ to succeed in such endeavors?
Guthery: Alts trends favor platforms like FusionIQ. Product development trends continue to focus on the democratization of alternatives. Staying at the forefront of these trends while aligning the liquidity of the underlying investment with the right wrapper is key.
Additionally, institutional products such as private real estate, private debt and private equity are not receiving great service from the largest alternatives platforms out there today, despite paying high costs to access these platforms.
Managers of high-quality products willing to look beyond the largest alts platforms will benefit from customized and comprehensive support from alts platforms that service the whole portfolio at a more reasonable price.