The other day, I was reading an article on RIABiz that’s worth discussing here on FactRight’s blog, as it hits on themes that are analogous to alternatives investments, even though it’s not an article about alternatives at all.
By the way, RIABiz is a free online publication that exclusively covers the RIA channel, and has for over a decade, making it probably one of the longest running publications dedicated to RIAs out there. Their coverage is much more editorial than, say, Investment News, and it is very enjoyable to read.
The stench may be clearing
It was an article about annuities, and how insurers may finally be embarking on real attempts at targeting the RIA channel, and overcoming the decades-long “stench” that surrounded these products and the sale of these products for RIAs. The article also likens past attempts of insurers to gain RIA distribution to Lucy pulling the football away from NFL placekicking-great Jan Stenerud. (See, I told you RIABiz’s writing is enjoyable.)
The key stated reason behind the RIAs’ growing and/or renewed interest in these products (and the insurers’ willingness to invest in that channel) sounds very similar to a primary benefit that’s often cited for alternatives: namely, advisors need to diversify their clients’ fixed income buckets away from the traditional bond category.
But distribution challenges persist
The challenges that the insurers face will sound familiar as well. Annuities are sold and not bought products, and as the renowned, RIA talking head Michael Kitces is quoted as saying in the article, most RIAs do not respond well to product wholesalers. They do not want wholesalers funding lunches for their clients and don’t need wholesalers showing up with investment ideas. This misalignment between distributor and advisor is, in my opinion, the primary reason why traditional capital markets groups for alternative sponsors are finding the RIA channel less than receptive to wholesaling efforts. Interestingly, Kitces further claims that the traditional way of product wholesaling is breaking down, and I think he’s more right in the claim that wrong.
Then there’s the idea that annuities have always been opaque products around fees that were laden with commissions. But the author asserts that the insurers never cared about the commission: only the broker dealers did. Changing perceptions will be slow, but the annuity industry seems to be making the investment for the long game, and finally listening to what RIAs need to serve their clients with these products.
Finally, an article posted on the same page as the annuity piece (originally published in 2016, when full implementation of Department of Labor Fiduciary Rule seemed imminent) notes how a market shift away from commission-based products will force insurers to pursue new channels for their annuities—the prime target being RIAs. Even though the final rule never went into effect, its legacy on this and many other points continues to be indelible.
Lessons for alternatives
By now you can see that this article could have been written around alternatives instead of annuities, and almost of it would equally apply—only the cast of characters would change. There’s a growing demand from RIAs for the type of benefits alternatives provide. History and perception are working against both types of products in the RIA channel. The traditional distribution model, crafted, cultivated and applied for decades in the broker dealer channel has limited applicability in the RIA channel.
So the distribution model will change. Increasingly, RIAs are reaching out to FactRight for help on curating alternative investment platforms, instead of relying on product wholesalers to assist in constructing them. And as fee structures and transparency around annuities will need to evolve to gain more momentum in the RIA channel, so too will the channel drive changes to alternative investment products. The future for alternatives in the RIA channel is bright if they can overcome many of the same challenges that annuities face.