It’s time for financial advisors to help investors gain access to alts

The long-outdated accredited investor rule has become a symbolic roadblock between retail investors and institutional-quality investments.

It seems like nothing raises the hackles of regulatory wonks like the notion of allowing the great unwashed retail masses access to those dangerously deceptive Wall Street creations known as alternative investments, or simply, “alts.”

While the definition of an alternative investment can vary widely, the Securities and Exchange Commission is pretty clear on what makes a retail-class investor. Forty years ago, the powers that be, likely reacting to some kind of financial scandal, defined accredited investors as those with an income of at least $200,000 or a net worth of at least $1 million, excluding the primary residence.

Those lucky folks can invest in alts to their hearts’ content.

The next level up from accredited is a qualified purchaser, which requires an even bigger bank account but little else in terms of sophistication or financial acumen.

But back to the hapless hoi polloi still flying in the main cabin and randomly boxed out from the kinds of investment opportunities the world’s largest pensions, endowments and foundations rely on to amass fortunes.

To paraphrase former SEC chairman Jay Clayton speaking earlier this month at the Pershing Insite conference, all the smart money is taking advantage of opportunities that are almost impossible to access by most retail investors, yet the regulators insist they’re doing the right thing by only letting in individuals and institutions that already have lots of money.

Clayton, who was SEC chairman from May 2017 through December 2020 and is now the nonexecutive chair at Apollo Global Management, described the current SEC under Chair Gary Gensler as “highly business skeptical and commercial skeptical” and prone toward over-regulation.

Acknowledging the risk of being accused of “talking his book” as a representative of a firm selling alternative investments, Clayton cited what he sees as a cruel byproduct of the restrictions on access to alternatives.

“Capital formation these days largely comes from outside the public markets, yet the investing public is largely held outside those private markets,” he said. “All investors should have access to a portfolio that looks like a well-managed pension fund.”

Ironically, the most popular battleground for years has been the aforementioned accreditation rule that was introduced back when the median U.S. household income was around $23,000, the average home price was $82,000, and Joe Biden had only been in Congress for 10 years.

While it’s easy to joke about the static existence of the accreditation rule as stuck in a period when there were a lot fewer millionaires in this country, the realities of economic growth, prosperity and inflation have effectively diluted the rule.

Adjusted for inflation, it would take more than $3 million in 2023 to achieve the purchasing power of $1 million in 1983.

In other words, $1 million ain’t what it used to be. And while most people still don’t meet the $200,000 annual income threshold, anyone with a few decades of work and savings under their belt will likely have more than $1 million in retirement savings.

Even though I’m not a fan of using bank accounts to determine investor sophistication, I do appreciate the varied nuance and complexity that can come with alternative investments. This is where financial advisors can step up and have a major impact.

As my colleague Mark Schoeff Jr. has been closely following, there is at least a glimmer of hope that the SEC will expand investor access to alternatives by allowing financial advisors to act as accredited investor representatives on behalf of their clients.

This effort to expand the accredited investor pool gained some traction through a 2020 SEC rule, but the final step of making accreditation a transitive property is currently being blocked by Democrats in Congress.

Matt Brown, founder and chief executive of CAIS Group, an alternative investments platform, optimistically places the chances of advisors providing clients with accreditation through affiliation at 50% by year-end.

“That would be game changing because the entire population could be potentially affiliated with an advisor who is accredited,” he said.

Just as the idea of wading into accredited waters on behalf of clients won’t appeal to every financial advisor, proponents are envisioning a system involving education and certification that might not be the right fit for every advisor.

Brown, who could also be accused of talking his book, envisions special training and certification for advisors wanting to act as accreditation proxies for their clients.

Ultimately, as Clayton put it, the regulators and the financial services industry need to come together and get past the notion that the only answer for retail investors is off-the-shelf liquid and transparent funds.

Citing the prevalence of mutual funds on retirement plan menus, he summed it up as, “You’re paying for liquidity that you don’t need and can’t access.”

“Pick a target date fund, for example, why wouldn’t there be a sliver of privates or alternatives in there?” Clayton added. “If I’m a 401(k) investor I should be able to get something that looks like a CalPERS portfolio. Why wouldn’t you have a 10% slice of privates in your retirement portfolio when you’re 50 years old?”