Advisor survey shows strong demand for education to bolster knowledge of trending asset classes
Financial advisors are anticipating a growing focus on alternative assets among retail investors but admit they lack comprehensive knowledge of these investments.
Half of the respondents to the 2023 iCapital Financial Advisor Survey said that client interest in alternatives had increased in the past two years and almost all of those who currently use alternative investments in client portfolios plan to increase allocations in the coming year.
However, 95% of advisors said they would welcome educational content on alternatives with only a quarter saying they are “very knowledgeable” about these asset classes and 12% admitting that the complexity of these investments makes it hard for them to understand.
The survey of registered investment advisors in the U.S. focused on those whose client base is at least 50% individuals and families. Of all respondents, 80% use alternative investments in client portfolios.
Opportunities and challenges
With private assets now totalling more than $12 trillion having almost tripled in the past decade according to PitchBook data, there is growing interest among retail investors, although Bain & Company data shows that they make up just 5% in a market dominated by institutional investors.
With the gap narrowing though, advisors with large individual and family client bases see the potential of alternatives and 44% of those using these assets in client portfolios intend to increase allocations in the year ahead, rising to 56% among those with at least US$500 million AUM.
Diversification is the top reason cited for using alternatives, followed by differentiating or enhancing their offering to clients and prospects, access to sophisticated/unique investments, lower volatility, enhanced returns, inflation hedge, enhanced income, and tax benefits.
However, advisors cite challenges with alternatives including liquidity/long lock-up periods, high fees, complexity in explaining them to clients, amount of documentation/due diligence, lack of transparency, suitability concerns, eligibility, and high minimum investment amounts.
Top alternatives
The survey found that the most used alternatives across financial advisors are:
- Real estate (78%)
- Private equity (62%)
- Private credit (50%)
- Hedge funds (48%)
Among advisors with $500m+ AUM, usage of these asset classes is around 10 percentage points higher than the wider advisor pool.
