As the Securities and Exchange Commission considers easing rules surrounding investments in unregistered securities, financial advisers could find themselves as the gatekeepers between ordinary investors and the private market.
In a
recent letter to the SEC, Republicans on the Senate Banking Committee asked the SEC to consider allowing investors to pool their crowdfunding money into a fund managed by registered investment advisers.
The notion of allowing more investors – beyond those who meet income or net worth thresholds — into private markets has gained momentum thanks to a
recent SEC comment request on reforming so-called exempt offerings.
SEC Chairman Jay Clayton
has been vocal about opening private markets to more investors so that they can be in on the ground floor of emerging companies.
Advisers may be relied upon as intermediaries if more of their clients become eligible to buy private placements. But there's no guarantee they'll know any more than their clients do about often complex, risky and illiquid private equity and hedge funds and other private vehicles.
"I don't think many investment advisers are skilled enough to pick private investments on behalf of their clients," said Peter Lazaroff, co-chief investment officer at Plancorp. "In the aggregate, the average RIA is not equipped to assess these types of investments."
Phil Huber, chief investment officer at Huber Financial Advisors, has similar misgivings about advisers' ability to navigate the private market, where $2.9 trillion was raised in 2018 compared to $1.5 trillion on public exchanges.
"Just because they're an RIA doesn't mean they have the background or expertise in private investments," Mr. Huber said. "Even advisers that get it themselves struggle with implementation" in portfolios.
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It's crucial that anyone looking at the private market understand what they're getting into, according to Lawrence Calcano, chief executive of iCapital Network, an alternative investment platform that connects advisers and their high-net-worth clients to private equity and hedge funds.
"Individuals who are saving for their own future should have access to these kinds of investments in the right way — an educated and protected way," Mr. Calcano said. "Having advisers play a role in that process is helpful to investors. The advisory community would have to make sure they're appropriately educated to explain what a fund does."
Proponents of expanding access to the private markets say that it can diversify the retirement portfolios of people in defined contribution plans, such as a 401k, with the same private investments that defined benefit pensions can access.
"The SEC's openness to investment products other than mutual funds, stocks and bonds for long-term retirement plan savers is encouraging," Tony Chereso, chief executive of the Institute for Portfolio Alternatives,
wrote in a statement on the organization's website. "The IPA is also actively encouraging the Department of Labor to issue guidance under [federal retirement law] that would help facilitate the inclusion of alternative asset classes within DC plans."
Private placements may work better in some retirement plans than others, according to Mr. Lazaroff. For instance, including them within a target date fund would introduce less chance for investor harm than putting them on a 401k menu.
Increasing the liquidity of private funds also would facilitate their use in retirement plans, according to Mr. Calcano.
"Having a thoughtful approach to improving the liquidity options for investors is an important part of these rule changes," he said.
Still, caution is key when making investments in the private market.
"Most investment success comes down to minimizing mistakes and letting compound interest work without interruption," Mr. Lazaroff said. "Private investment opens the door to more mistakes."
