Even as warning signs keep popping up around private credit, a new survey suggests advisors are becoming only more eager for ways to move clients into alternative assets.
The fintech iCapital, which helps advisory firms gain access to private equity, private credit and similar investments, released results from its Global Advisor Survey showing that advisors' interest in putting clients in alternatives to standard stocks and bonds is only growing. From a poll of 870 of RIAs, broker-dealers and other wealth managers around the world, iCapital reported that nearly 40% of its respondents plan to allocate more to alternative investments in the coming year.
That was up from 14% in last year's survey, which had responses from 603 firms.
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The respondents also testified to improvements in their ability to gain access to private investments, many of which for years were almost exclusive to institutional investors like foundations and pension funds. Only 5% of this year's survey takers said they had too few or no options for investing in alts, down from 11% the year before.
Other concerns cited by respondents this year were private markets' lack of liquidity (9%), high fees (13%) and the
Private markets continue to divide opinion among wealth managers and investors. Some see private equity, private credit, private real estate and similar investments as ways to juice clients' returns and
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Can private markets be squared with advisors' fiduciary duties?
Others, though, worry about private investments' often high costs, lack of transparency and barriers to divestment. Michael Garry, the founder and CEO of Yardley Wealth Management in Yardley, Pennsylvania, said he almost never recommends private assets and said he has a hard time squaring alts' supposed advantages with his fiduciary duty to always put clients' interests first.
He said advisors, particularly owners of RIAs like him, have to make sure any private investment they are weighing for clients offers real advantages to public options that have offered sound returns for decades.
"They have to be able to show that they have done due diligence on the various funds out there, that the fees are reasonable, that they do what they say they do and … that it's actually different from the S&P 500," Garry said.
Garry said his clients range from having $500,000 to $10 million in investable assets. Many are in or nearing retirement and need their savings to be liquid to pay for everyday expenses.
With many retail investors still new to private markets, Garry said there's not enough of a track record to say with confidence that private equity, private credit or other alternatives can truly offset losses in stocks or bonds during an economic downturn.
"Even if it did provide ballast when public markets tank, if the client can't access that money because of whatever restrictions, then what good is it?" he said.
Michael Hollis, the founder of TapestryFP in Aurora, Illinois, said he doesn't favor private markets but thinks many of the concerns about fiduciary duty can be mitigated by making proper disclosures about fees, illiquidity and other commonly cited drawbacks to alts. Unfortunately, he said, that's not a step all advisors take.
He said one of his clients came to him with a portfolio already containing alts. The investments, Hollis said, were touted as carrying little risk and guaranteeing strong returns.
"What was not explained well was the compensation flowing to the advisor and broker-dealer who recommended them, the tax consequences or how illiquid they were," Hollis said. "Unwinding these has been a tremendous amount of work, and for a couple of the holdings, it will take several more years."
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Private credit sounds alarm bells
Anxieties about alts have swirled particularly around private credit, which involves loans made outside the regular banking system to heavily indebted companies. Recent cases of borrower fraud, along with fears that AI could undermine software companies that have taken out private loans, have prompted many investors to try to take their money out.
Those requests have led large asset managers
Not surprisingly, private credit lost popularity among advisors in iCapital's latest survey. Only 43% of the respondents said they plan to increase their clients' allocations to private credit, down from 56% in the previous year's poll. That lagged behind advisors planning to put more clients in private equity (64% of the respondents) and private real estate (50%).
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The research firm Cerulli Associates has said retail investors now have roughly $2.2 trillion in private markets and predicted they could add a further $2 trillion to that in the next five years. ICapital's survey suggests that clients are becoming more attuned to alternative investments. Forty-five percent of the respondents this year said their clients have grown more interested in alts, up from 42% last year.
ICapital's survey also showed an increase in firms building alternative portfolios on their own. Fifty-two percent of the respondents this year said they do investing in alts all in house, using their own research and investment teams. That was up from 50% the year before.
Half of the respondents this year meanwhile said they build their own model portfolios for investing in private markets, while 36% said they rely on portfolios built by outside investment managers.
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The willingness to place clients in alternatives varied by firm size. Firms with less than $400 million in assets under management said they were most likely to allocate between 5% and 9% of client portfolios to alts, while those with more than $1 billion in AUM said they would set aside between 10% and 19%.
ICapital's latest survey suggested the biggest thing preventing advisors from putting more clients into alts is difficulty in understanding the liquidity constraints and risks of private markets. Fifty-nine percent of the respondents cited that obstacle, up from 55% last year.
Fifty-three percent of this year's respondents said compliance and regulatory concerns were a primary obstacle while nearly half cited difficulties in understanding how alternative investments affect general portfolio construction.
