By Mike Huisman
The opportunity for alternative investment sponsors couldn’t be clearer. With most institutions (and many high-net-worth individuals) having long ago followed “the Yale model” and allocated a portion of their investments to alternatives, the mass affluent arguably represent the key growth segment for alts sponsors.
According to a recent RIA Intel article that cited data from Cerulli Associates, retail investors today account for half of the addressable market for alternative investments.[1] The same report indicated that fewer than half of advisors currently allocate client money to alternatives and, among those who do, the average allocation is less than 5% (versus 40% for HNW investors).
Plenty of room to grow.
Sponsors get it and, in most areas of their business, are aggressively adjusting to this increasingly important constituency. They’re creating products that are simpler and often more liquid than their institutionally geared precursors. And, in lieu of the “elephant hunting” approach of the past—when a couple of well-connected sales pros backed by a strong cap intro team at the bank could conjure a billion dollar hedge fund or private equity vehicle in a matter of weeks—they’re developing distribution models that are more marketing than sales, more scalable and more repeatable.
In our experience, the one area where sponsors have been slower to shift into a higher gear is investor servicing—starting with account onboarding. Amazingly, we still see funds using the same hard-copy subscription documents to onboard individual investors—hundreds of them!—that they were using when it was just a dozen-and-a-half pension funds, foundations, endowments and family offices.
Forget the enormous inefficiencies. Not just the cost of processing all that paperwork, but also the associated NIGOs. (Historically speaking, some 30-40% of hard-copy investor forms include some sort of error that will take days or even weeks to cure, especially when an intermediary is involved; meantime the investor’s capital just sits on the sidelines, earning no fees for the sponsor and no meaningful gains for the investor.)
Forget the compliance risks from hard-copy subscription docs that have no automated checks to make sure suitability questions get flagged, that the forms are filled out properly and that the answers in one section foot with those in another. Opportunities for compliance snafus are multiplied by the fact that many popular alternative investment vehicles are subject to state-by-state regulations.
Overlook all that and think about the customer. “As a part of the buying experience,” KPMG writes in their fascinating report, Alternative Investments 3.0: Digitize or Jeopardize, “clients want a smooth on-boarding experience, now seen as the norm in e-commerce.”[2]
Think about “Tim,” the 27-year-old from Austin, Texas, who told New York Magazine he was politically engaged but famously had this to say when asked whether he voted: “I tried to register for the 2016 election, but ... I hate mailing stuff; it gives me anxiety.”[3]
Like it or not, if you’re an alternative investment sponsor looking to tap the retail enormous opportunity in the retail channel, Tim is your target client of the future. He may be an investor or—heaven forbid he manages to cobble a resume together and lands a job at an advisor—your agent. No matter how excited he is about gaining exposure to alternatives, he’s not going to be excited about filling out a form.
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[1] https://www.riaintel.com/article/b1h9wksvnp1myr/the-big-winners-if-advisors-wake-up-to-alts
[2] https://assets.kpmg/content/dam/kpmg/qm/pdf/alternative-investments-3-0-digitise-or-jeopardise-ci.pdf
[3] https://nymag.com/intelligencer/2018/10/12-young-people-on-why-they-probably-wont-vote.html