Firms and advisors need an alt-friendly tech solution

Investors are increasingly showing more interest in alternative investments, which is likely due to a couple of recent trends.

One is the notion that the traditional 60/40 portfolio is dead. It stood up well against more complex strategies for decades, but more recently, it has underperformed, thanks mainly to spiking inflation, which caused havoc in the bond market. Naturally, many are unlikely to consider investments that experience massive losses as “safe.”

The other is the big push by large institutional asset managers to make alternatives available to broader portions of the investment public. Firms like KKR and Blackstone have gone down-market, with some estimating that the effort could eventually prompt an inflow of up to $3 trillion into funds aimed at retail investors.

Whatever the case, it’s fair to assume that alternatives will become a more significant part of investor portfolios in the future. If so, firms and advisors will need tech that enables better service to clients exposed to such assets. For the most part, it all comes down to a lack of integration.

Let’s take a look at the stakes associated with alts-friendly technology.

REDUCING OPPORTUNITY COSTS 

It shouldn’t take more than about 10 seconds to aggregate all of a client’s performance reporting data. In other words, just a few clicks of a mouse. Yet when advisors work with systems that are siloed from one another, they must do this manually, which can take hours.

Now, imagine doing that for hundreds of accounts. That sort of time investment is an enormous opportunity cost that keeps advisors from doing things that could help them generate more business (meeting with existing and prospective clients) or improve internal processes (coaching staff or junior advisors).

CREATING ALIGNMENT

For our purposes, let’s say a client in their mid-60s is set to retire soon. Of course, everyone’s risk profile is different, but let’s assume that, as for many in their age group, huge portfolio losses would muddle this plan, so they're worried about long-tail risk.

Bonds may not be the best option for them since, in recent years, they’ve proven to be just as risky as ostensibly more speculative assets. It’s possible, though, that a select basket of alternatives could be the antidote. But if their advisor’s tech platform can’t make sense of those solutions, it’s hard, if not impossible, to do a proper risk analysis.

The result? Investments and goals can get misaligned. Were that to happen, the fallout for a client would be severe. Moreover, advisors need to be mindful of today’s regulatory environment, where one Reg BI violation could ruin their reputation and produce a heavy fine.

SIMPLICITY 

Even sophisticated investors can struggle with industry jargon and the nuances associated with implementing sophisticated planning strategies, including those involving alternatives. Take the above-mentioned long-tail risk. 

How many clients would use those words to articulate one of their fears? Chances are, not many. Yet, it’s likely a lot of them worry about the phenomenon impacting their portfolio.  

Therefore, a missing link is the tools that allow advisors to bridge those knowledge gaps. Those can make complicated terms and phrases more accessible, which, in turn, simplifies risk analysis.  

Investors – and advisors, for that matter – make better decisions when there is clarity. So, when it comes to alternatives, ask yourself: Is my tech intuitive? Does it make the complex more manageable? And, crucially, does it simplify the conversations I have with clients?

Like any other industry, wealth management has gone through its fair share of business cycles, with one trend enjoying its day in the sun, only to be replaced by another one. Yet, given the increased skepticism about the 60/40 portfolio and asset management behemoths spending billions to target new audiences, the democratization of alternatives seems here to stay. 

Therefore, a tech platform that reflects this reality isn’t a nice-to-have. It’s a must-have.  

Akhil Lodha is CEO of StratiFi, a risk and analytics platform.