Advisers wary of becoming gatekeepers to private markets

The Investment Adviser Association wants discretionary clients of fiduciaries to be accredited

Investment advisers generally are leery of becoming the gatekeepers to the private markets for their clients, although some say they’re happy to be a portal for increasing access to unregistered securities.

Last week, the SEC expanded the pool of investors who can purchase private equity, hedge fund and start-up company shares, as well as other private placements.

Under the new rule, people who hold securities licenses or have other expertise or experience qualify as accredited investors, even if they don’t meet the required wealth and income thresholds.

The SEC said it was open to adding additional ways for investors to be deemed sophisticated. The Investment Adviser Association is advocating for the inclusion of discretionary clients of SEC-registered investment advisers.

Gail Bernstein, IAA general counsel, said investment advisers’ fiduciary duty to their clients ensures they will be good Sherpas for their entry into the private market.

“The adviser’s sophistication should be good enough to be able to put the client in an investment that the adviser thinks is in the client’s best interest,” Bernstein said.

Unregistered securities lack the disclosures required for public offerings and can often be illiquid and risker than ordinary investments. But they also can add balance to portfolios and increase returns.

Advisers have mixed opinions on whether they’re best positioned to sort it all out for their clients.

“I don’t like it,” said Mitchell Hockenbury, an adviser at 1440 Financial Partners. “It’s about like a black box looking at some of this stuff. I don’t think investing is that complicated. The industry has tried to overcomplicate it.”

Many advisers cannot determine a value on private placements, said Daniel Yerger, president of My Wealth Planners.

They’re “really not qualified to evaluate the investments or make recommendations around them,” Yerger said. “The economy of scale isn’t there to efficiently evaluate these offerings.”

But Thomas Hlohinec, founder of Rise Financial Partners, said advisers are in a good position to help their clients navigate the private markets.

“It would level the playing field and do it in a way that would require more due diligence be performed,” he said.

Colin Overweg, founder of Advize Wealth Management, also supports the idea of expanding private-market participation beyond those who have $1 million in assets in addition to their homes or who make more than $200,000 annually, the current thresholds.

In most cases, he said, he would recommend against a client buying a private placement. But he’d like for them to have that opportunity.

“I’d prefer more options than less, even if we don’t necessarily use them,” Overweg said. “I really don’t like the idea that I’m not allowed to do something with my money.”

But actually being the gatekeeper doesn’t appeal to him.

“I would prefer being the one analyzing how this impacts the retirement plan rather than being the one analyzing the private investment itself,” Overweg said.

Advisers and the IAA agree that giving a green light on a private placement will vary depending on a client’s circumstances. For instance, many investors can’t afford to have investments tied up for years, as they often would have to be in private placements.

“With less sophisticated investors with less money, that’s going to happen even more,” said Lora Hoff, an adviser at IPI Wealth Management. “There are similar investment classes without that kind of illiquidity and risks.”

Bernstein acknowledges private placements won’t be good for all clients.

“That determination should be made on a case-by-case basis,” she said. “The answer will often be ‘no.’ Sometimes it will be ‘yes.’”

[More: State regulators concerned about impact of COVID-19 on private markets]