Thorough And Deep Due Diligence, Combined With Advisor Preparation, Counters The Industry Trend Of Slow But Steady Erosion In Alternative Investment Opportunities
The wealth management industry has undergone enormous change over the past decade, mostly driven by better technology, increased regulations and considerable consolidation. Some of the changes came fast, up-ending advisors’ businesses. Others, especially in the independent space, have happened more gradually.
One of them was laid bare for all to see amid last year’s steep selloff in the equity markets – the shrinking number of alternative investment options on many firms’ product shelves.
Where Have All The Products Gone…
Many firms and advisors felt alternatives were too risky or didn’t offer enough upside during the most recent bull market. Even today, some larger broker-dealers have refused to provide alternatives to older investors, concluding (erroneously) that liquidity is always the most important consideration for them.
However, with volatility spiking since the beginning of 2022, many advisors have rediscovered how important having an allocation to non-correlated assets is to the overall strength of a portfolio.
Still, compared to 10 years ago, the number of alternatives on product shelves is limited, with many firms not yet ready – or able – to provide their advisors with access to these critical investment solutions.
To be clear, the industry wide fall-off of alternatives wasn’t something that happened overnight. It was a slow drip that occurred over the course of many years.
Here’s how we have resisted prevailing industry trends by maintaining an extensive product shelf over the long run:
Rejecting the easy way out. Nearly every firm takes product due diligence seriously. Even so, whether all of them invest as much time and effort into that process as they could is a question worth asking. Sufficient but not exhaustive due diligence sometimes means smaller programs and innovative emerging sponsors are ignored out of abundance of caution.
But while that approach sounds good from a risk standpoint, it also results in advisors getting denied access to multiple products across various categories that can serve their clients’ disparate needs. More than that, though, a limited product shelf can create concentration risk, since it’s possible that a firm’s entire menu of alternatives could be limited to one sector, like real estate.
Going deeper. During the due diligence process, sometimes firms will only analyze the underlying investment itself. It’s imperative to take a deep dive into the product sponsor’s background as well. Admittedly, this approach means that we have passed on some offerings that were the toast of the market at any given time.
But it also means that we have been able to add products that others may have rejected just because they came from small sponsors that are nonetheless capable of putting together quality, well-rounded and reliably profitable projects.
Making advisors part of the solution. Matching a client with an alternative that meets their needs can be ripe with challenges. But it’s possible to avoid some of the pitfalls related to this process. We start by recruiting high-quality, client-focused advisors in the first place. Then from there, we require them to complete product training programs. This helps to ensure that advisors fully understand what is on our shelf and gives them a firm foundation for pairing clients with an alternative solution that is right for them.
Sometimes change happens at a breakneck pace. Other times, though, you barely notice what’s happening until it’s too late. Thankfully, we’re not there yet when it comes to alternatives. But if enough firms ignore the problem for too much longer, advisors seeking a wider range of investments may have to start looking for a new partner to find a solution.
Bryan Yvon is the Director of Business Development at SFA Partners, an Atlanta-based family of companies focused exclusively on empowering independent financial advisors.
This article is part of WSR’s Sponsor Partner Content series.