Over the last decade, alternative investments have become a mainstay for institutional and certain sophisticated ultra-high-net-worth investors (UHNWI) seeking greater diversification. Drawn to the fact that many alternatives tend to display little to no relationship to the price movements of traditional assets like stocks and bonds, many feel that allocating a portion of their portfolio to alternative assets is a prudent way to help improve a portfolio's overall risk/return profile. Others focus on the ability of certain alternatives, or alternative investment strategies, to hedge (or offset) any potentially adverse effects of large, unfavorable swings in the market. These are two aspects often given as the main reason investors are interested in alternative assets.
Over the same period, there has been a growing interest in alternatives among both financial advisors and their affluent or high-net-worth-investor (HNWI) clients. And, we should add, their interest stems from the very same characteristics that institutional investors recognized: diversification and potential downside protection. However, unlike most large institutions, advisors and individual investors still face significant hurdles that often prevent them from investing in alternatives.
Individuals often lack the same type of access to deals and educational information about investment opportunities as institutional investors. Whether it's the high minimum investment requirements that put alternative investments out of reach (even for HNWI and UHNWI), or a general lack of the resources and expertise needed to properly conduct due diligence on a given investment, for the average investor these hurdles are often too difficult or costly to overcome.
But this is on the cusp of changing.
In recent years, technology has been used to drive change into nearly every aspect of our daily lives. It is transforming how we use automobiles (think Uber combined with autonomous vehicles, for example), how we bank, navigate, date, and socialize. Some industries are adapting, while others are being displaced. Why should the alternative investment space be any different? Essentially the same approach can be applied. Use technology to streamline antiquated processes, drive down operational costs, and improve the client experience.
Demand for alternatives from the large and relatively untapped retail channel, combined with an investment industry that is still chiefly paper-based, with redundant and/or outdated processes (are you still faxing at your firm?), signals the exact type of opportunities that nimble, motivated technology-based companies have capitalized on in other sectors.
There are hundreds if not thousands of companies currently focused on using technology to improve not only how we invest in alternatives, but how every corner of the financial services industry operates. From online lenders, to robo-advisors, to the latest mobile banking or payment apps, financial technology (or Fintech) companies are working to revolutionize product structures, distribution models, and basic operational processes, all while keeping a laser-focus on improving client satisfaction. The alternatives industry is simply taking a page from the many other industries going through similar transformations.
Alternative investment platforms and portals have emerged as an innovative way to broaden access to the alt space, while opening the door to entirely new investment opportunities, like marketplace lending. The Fintech companies driving this evolution are, in a sense, creating the beginnings of a completely new, online marketplace by dealing with the challenges of access and education for investors looking to add alternatives to their portfolios.
The result―a democratization of alternatives―was helped in part by regulatory changes such as the JOBS Act (which, among other things, ended the ban on “general solicitation” for certain Regulation D securities). The financial crisis, which encompassed the “Great Recession,” uncertain and volatile financial markets as well as the “credit crunch,” also played an important role in setting the stage for this technology game changer.
But as with all democracies, new freedoms bring new responsibilities. So while investor desire for alternatives and a changing regulatory environment opened the door for Fintech companies to invent these online alternative-focused marketplaces, other players in the industry have had to evolve as well. For example, custodians are responding to the digitally driven world of alternatives by evolving how their services are delivered and how their clients' assets are accessed, documented and held. Any advances by the support players in the industry can only help speed and sustain its growth overall.
As investor interest and demand increases over the coming years—as many recent surveys and reports seem to indicate—financial technology firms and supporting financial service providers will continue to evolve best practices and develop state-of-the-art solutions. No one knows what the final version of this new marketplace will eventually look like. However, similar to the evolution of online trading, technology is likely to play an increasing role in helping to address the challenges that investors have historically faced when attempting to
access and learn about alternative assets.
Gary Anetsberger is the Chief Executive Officer at Millennium Trust Company, LLC. Mr. Anetsberger has over 40 years of extensive experience in the financial services industry.
Millennium Trust Company performs the duties of a directed custodian and, as such, does not provide any investment, tax or legal advice, or perform any due diligence on behalf of account holders or third parties.
