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RIAs and Alternative Investments Part 2: Types of Firms

by Scott Smith

As we continue to meet with registered investment advisors that want to enhance client service and grow their assets under management through alternative investments, we pick up more critical insights that will help us deliver the right solutions to this group.

We’ll share our learnings on RIA needs around alternative investments through a regular feature on this blog. A few weeks ago, in our first post in this series, I wrote about how the RIA moment for alts has arrived. Today, I’ll continue with the discussion by very briefly describing two profiles of the RIA firms that we are encountering.

Profile 1: the firms that know they want/need alts

On one end of the spectrum, we meet with firms that envision alternatives will someday comprise a much more significant portion of client assets than they do now. Maybe they’ve recently broken away from a broker dealer or still have some affiliation to facilitate certain client investments. It’s likely they have some experience with public, non-traded alternatives, like REITs and BDCs, in the past. If so, they currently do not have many clients that are suitable for new alt products, but they are starting to form referral relationships (such as with CPAs) to bring in prospects. They know accredited investors especially will be key to their efforts to better incorporate alts into their practice before they move on to their mass affluent clients.

They are aware of what alternatives exist and that they want to use them especially for those accredited clients, but they don’t yet have the understanding to confidently talk about and build their business through alts.

Profile 2: the firms that need help with the alts they already have

On the other end of the curve, we meet firms that closed the education gap long ago. These are established RIAs that have already fully integrated alternative products into their practices (to the benefit of their AUM).

One firm in particular we are speaking to has a large list of alternative products approved for client allocation. Because they are known for that, they are becoming increasingly inundated with inbound calls from sponsors. The operational work to add new products and maintain/monitor their existing platform is now overwhelming, and they know the effort isn’t cost-effective. 

They already depend on third-party due diligence reports. But they realize the value of outsourcing more of the due diligence and compliance function. What these firms want is customized advice from a third-party expert, and curation to help them wade through the specific options out there, even as they have an excellent understanding of product types.  

Regardless of the type of RIA…

Certain needs and pain points associated with alts transcend the type of RIA. This terrific whitepaper (The Rise of Alternative Investments in the RIA Industry) put out by PFI Advisors a few months ago highlights a few themes that resonate with both types of firms I’ve described in this post, as well as nearly everyone in between that we meet. Most poignantly:

Many RIA advisors don’t have the internal bandwidth to conduct the proper due diligence and create sufficient compliance files to satisfy SEC auditors during a routine exam.

Obviously, due diligence is crucial for any wealth manager working with any type of investment product to undertake in order to fundamentally manage risk, and likely is the first difficulty that needs to be tackled. The whitepaper also points out that lack of transparency and scant client education can form barriers to growth. And the inevitably limited perspective a firm has on what’s out there and available to clients (even for well-established firms fitting profile #2) is a hurdle to be cleared in creating an optimal platform.  

These are the problems we are equipped to solve for wealth management firms. As always, feel free to reach out to us to learn more. Visit our website to view a webinar on True Diligence services, or contact me (Scott@FactRight.com / 847-805-6248) or our VP of business development John Paliotta  (John.P@FactRight.com / 214-766-6226).

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