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What We’re Learning About RIAs and Alternative Investments

by Scott Smith

For the past couple of weeks, I’ve been on the road with John Paliotta, FactRight’s new vice president of business development. Our goal was to get out in the trenches and meet with registered investment advisors who are actively seeking to incorporate alternative investments into the solution suite they offer to clients and to hear about their experiences and their frustrations. As we hear their stories, it’s clear that RIAs are becoming increasingly savvy about alts. They view alternatives as a key to distinguishing their practices, enhancing the performance of their clients’ portfolios, and growing assets under management in a way that comports with their fiduciary duties. They also recognize their own limitations and the obstacles that stand in the way of full integration of alternatives into their platforms. 

What’s also become clear to me is how much has changed for RIAs in a relatively short period of time. The following themes emerged in almost every discussion we had with a dozen or so RIA firms:

 1. Alignment is everything. Alignment is baked into the long-term relationship RIAs have with their clients. Whatever you are selling (alternative investments, consulting services, or coffee), RIAs want to know that you’re fully aligned with them and their clients. Compare that to BDs, where alignment might be third or fourth on the list of priorities that drive decisions. That’s not to say it’s unimportant to those folks, but increasing RIA involvement in alternatives will spur further (and welcome) sponsor-investor alignment in alternative products.

2. Internal capacity for due diligence is meager.Most RIAs we talked to have no back-office solution to review alternative investments. A few have a CFA on staff, but that CFA’s time is not optimized by reading through 10-Ks and 10-Qs. Almost none of these advisors have the level of research and resources available to them to stay on top of the products that are closed but unliquidated. So, in one way or another, they all need help, and they all admit it. They especially want to be able to identify best-in-class products and are very interested in peer comparisons.

3. Client education is a hole waiting to be filled. Right now there is very little material for RIAs to share with their clients about alternatives, yet many RIAs rely on alts to help grow their AUM with accredited investors. Client education is the key to being able to place alternatives in client portfolios. FactRight has already begun to explore ways to make educational content available to clients of our clients.

4. The RIAs need additional education for themselves. A couple of weeks ago, we met with a custodian that is adding RIAs working in alts to its platform. John and I saw a very well staged, live training facility dedicated to hosting RIAs wishing to learn more about alternatives. Clearly, the custodian created this initiative to respond to a real need. At FactRight, we educate every day in many ways—from our due diligence reports on programs and their sponsors, to webinars and whitepapers, to our blog. Through these channels and more, expect more content geared toward empowering RIAs to confidently do business with alternatives.

5. The market between RIAs and alternative investment product sponsors will remain more inefficient than the broker dealer market.The retail broker dealer channel for alts is well established, whereas the RIA channel is relatively nascent. The operational headaches that RIAs need to go through to do business in alternatives go a long way to explaining why. The BD world has largely solved most of these problems, primarily through DTC and large, accommodating custodians. The RIAs are on their own, having to work with smaller custodians for many of the products FactRight covers. Sure, there’s Schwab and TD Ameritrade, but their definition of private alts is primarily constrained to large hedge funds. The RIAs we’ve talked to are looking more opportunistically for funds that aren’t as correlated to the equity markets as many hedge funds are perceived to be. And because sales are difficult to scale with RIAs, not many sponsors can build a team to distribute large offerings through the RIA channel exclusively. That’s a long way of saying that inefficiencies will remain for a while, yet…

6. The future is now. We’ve all been hearing for a while now how RIAs will eventually comprise a formidable distribution channel for alternative products. In anticipation, sponsors have devised new RIA-only share classes and innovative features that promote a larger degree of liquidity. But conversations with RIAs even a couple of years ago didn’t reveal many actionable insights. I used to hear RIAs talk about how they are getting paid to do the diligence. No one is saying that today. Instead, they’re all saying that their job is to go out and get more assets under management. This has motivated many smart RIAs to solve their operational challenges. Now we’re hearing about increased use of alternatives among RIAs directly from them. The direction of financial advising is shifting toward a fee-based model and a greater reliance on the use of alternatives to grow the business. In a recent survey by PPB Capital Partners on RIAs with $500 million or more of AUM, 45% expected their clients’ allocation of alts would increase in 2018. Only 7% of those surveyed thought it would decrease. The same survey found that nearly 50% of alternative investment allocations come from new AUM. The RIAs we talk to understand that offering alternatives is a critical strategy in achieving practice goals.

Watch this space

At FactRight, we plan to continue to meet with RIA firms to learn their needs and concerns around alts. We’re excited to be on the front lines with RIAs, helping them to better serve their clients. Not surprisingly, we’re finding that wealth managers need to lean on external expertise and resources in order to focus on practice management. Through FactRight’s True Diligence platform, we’re ideally positioned to provide the kind of customized due diligence, compliance, and educational support that RIAs and BDs need to grow their businesses through alternative investments. To learn more, visit our website to view a webinar on True Diligence services, or reach out to me ( / 847-805-6248) or John ( / 214-766-6226).


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