- November 1, 2019: Vol. 6, Number 10

Gimme access, gimme tech, gimme alternatives

by Sheila Hopkins

Technology is now so much a part of our everyday lives that it is sometimes hard to remember when that was not so. But it was not that long ago that no one knew they needed a cell phone, a desktop computer or Facebook.

We only have to go back to the early 1990s, for example, to find a time when all investment transactions had to be handled directly through a licensed broker, either with a phone call or a face-to-face meeting. Then along came Trade*Plus and its offshoot, E*Trade Securities, as well as TD Ameritrade and Charles Schwab, and the ability of your everyday nonprofessional investor to trade online while saving money exploded. As a result of investors embracing their newfound trading power, E*Trade saw its revenues increase from $850,000 in 1992 to $11 million in 1994. By the end of the 1990s, more than 20 percent of Americans owned stock, compared to just 5 percent 10 years previously. It took Charles Schwab only three years to reach 1 million online accounts and nearly half-a-trillion dollars in client assets. These online investment platforms changed the way we bank and invest, and heralded a golden age of securities investment.

In the September issue of Real Assets Adviser, we looked at the promise of fintech for investing in alternatives, such as private equity, hedge funds and direct real estate, which have typically been accessible only to institutional investors. These types of long-term, professionally managed investments could increase returns and reduce risk in private portfolios the same way they do in institutional portfolios, if only retail investors and their advisers could access them.

It’s not that alternatives were not available at all. It’s just that retail alternative investments have not always been delivered in a way that was efficient for financial advisers, so many chose not to offer them to clients. Those that did, however, found that it not only benefited their high-net-worth clients, but their business as well.

“In my experience, the RIAs that have best positioned themselves for accelerated growth with higher-net-worth clients have all offered their clients access to retail alternative investments to some extent,” says Larry Roth, managing partner of RLR Strategic Partners. “The implication is that for these firms to achieve their growth milestones, retail alternative investments should be an indispensable tool in their toolbox. For that to happen, the technology that delivers those products must be cost-effective, adaptable and robust.”

Now, as additional high-net-worth and not so high-net-worth investors begin learning about the benefits of alternatives, they are demanding that their advisers find ways to access these opportunities for them, as well. It is a good bet that any financial adviser wishing to meet this demand for his or her clients will be looking at straight-through platforms to gain access to institutional-quality funds. But are these platforms ready for primetime?

“At some point it will be electronic only,” predicts Stephen Blum, president of Strategic Wealth Planning. “Many advisers are not doing alternatives because of the paperwork. When the fintech platforms mature, I do think we’ll see a move to straight-through investing.”

The question, however, from the end users’ perspective, is how close are we to that “some point”? And how close are we to products that are economical, adaptable and robust?


Fintech investment platforms have been created to make it easier for advisers to offer alternative investments by promising reduced paperwork and entrance fees, as well as providing a list of products that would otherwise be impossible to access. The current crop of fintech platforms seems to be delivering on these promises, as users have found they actually are reducing paperwork and providing access to institutional-quality opportunities.

“Fintech’s strength is in streamlining the subscription process,” says Wayne McCullough, president and managing partner at Benchmark Private Wealth. “I like to say our partner has “Amazoned” the paperwork. By that I mean that I only have to fill out the forms one time, and their system will then take those answers and autofill other forms as needed. The information needs to be verified, of course, but it’s exponentially easier for me to subscribe to alternative funds via a fintech platform than by sending seven FedExes for three funds I want to go into. At a minimum, it allows me to gather everything in one place and every efficiency helps make my business better.”

In addition to streamlining and automating paperwork, and thus reducing errors, fintech platforms have worked to help advisers vet products they might otherwise be unfamiliar with.

“These platforms are particularly helpful for firms that aren’t connected to a big brokerage that does all the underwriting and vetting for them,” continues McCullough. “As an independent, we need to underwrite all of the alternative investments ourselves, and it’s a bit like the Wild West. There simply aren’t centralized or standardized places I can look for objective third-party analysis. The fintech platforms are helping by providing that underwriting service by partnering with credible third-party underwriters, such as Mercer.”

Several of the fintech platforms add their own due diligence to that of their third-party partners, providing deeper looks at what might be an unfamiliar asset class for some advisers. At the very least, they aggregate analysts’ reports and recommendations so that the RIAs do not need to spend an unreasonable amount of time searching for them.


As with most things in life, how well these platforms are accepted will probably come down to money, specifically who pays for them and how the RIA can continue to benefit from the client’s investments.

From the investors’ point of view, fintech platforms are a financial boon. Because they act as aggregators, the entry cost to individual investors is significantly lower than it would be to an institutional investor.

In addition, the platforms often are paid by the product sponsors that want to have their products listed. With this model, there is typically no out-of-pocket cost to the adviser for using the platform. Other platforms place a markup on the investment, which is passed along to the investor.

An adviser who uses a platform built on the first model will need to be on the lookout for the conflict of interest that can arise when a platform purports to provide due diligence on a product that is paying to be listed.

“These platforms are a de facto distribution channel for the sponsor,” explains Darren Whissen, founder and president of Atomi Financial Group. “When these platforms also provide due diligence, it creates a conflict of interest that the RIA must resolve. This issue hasn’t been tested with regulators or in major arbitration yet, but it’s bound to once we have our first real big blow up on one of these platforms.”

Blum agrees: “A sponsor can buy his way onto a platform. These platforms are not going to turn away a product that can pay, which calls into question what kind of ‘due diligence’ the platform owners are providing.”

When talking about costs, we also have to look at what placing clients in investments through these platforms could cost advisers in terms of management fees and commissions.

“One of the roadblocks to advisers making greater use of these platforms is the matter of assets under management,” says McCullough. “For example, if I take $2 million out of a TD Ameritrade account to put into an alternative, that $2 million is no longer under my control, and I’m not getting paid for it. To combat that, our partner has come up with a solution whereby they assign each fund or hedge manager a ticker symbol cusip that feeds into the TD Ameritrade database. Our alternative investments thus feed through Ameritrade to our platform and come up on our monthly report to our clients, just as our mainstream investments do.”

Although some platforms can accommodate an RIA’s need to process a management fee on a client’s alternative investments, there are a significant number that cannot.

“This means those RIAs using the latter group of platforms must manually process their management fees, which is an additional burden, as well as an opportunity for mistakes to happen,” says Whissen.


Fintech platforms are making headway in opening the alternative market to a wider universe of investors. However, a large group of advisers is not convinced they are ready for primetime. Besides the concerns noted above, this group finds other stumbling blocks to their total acceptance.

“Most alternative platforms are still basically just open marketplaces of investments,” says Whissen. “They only sell features, not benefits. That is, they generally provide no context with respect to the role that investment plays within an investor’s portfolio. Showing solely an investment’s asset class and targeted distribution rate is not enough for an adviser to properly evaluate an investment’s risk/return profile.”

Almost by definition, the growth of fintech platforms requires the acceptance of standardized inputs and outputs. That’s just how digital platforms work, no matter what industry they serve. Unfortunately, the financial services industry is far from standardized, and trying to fit a fintech’s round reports into an adviser’s individualized square is difficult.

For example, most alternative platforms provide little to no support with respect to an RIA’s compliance needs.

“Take a simple but important compliance protocol, such as a Blue Sky [i.e., state-specific] suitability requirement or a firm-mandated concentration guideline,” says Whissen. “The alternative platforms do not offer any solution to satisfy these protocols, so the RIA must still complete a healthy portion of the purchase transaction outside of the fintech. With enough of the transaction occurring outside the fintech, does it make sense to do any of it inside?”

Most alternative platforms also do not account for an RIA’s internal transactional disclosures and other related documents.

“To complete an alternative transaction,” Whissen continued, “we employ the following internal forms: New Client Form [if a new client], Advisory Fee Agreement [if a new client], New Account Form, Prospectus Receipt Form, Alternatives Disclosures and Purchase Authorization Form and Additional Risks Disclosures Form [when needed]. What good is it to an RIA to have the subscription document automated, but none of its internal forms?”

This same lack of individualization affects the advisers’ ability to generate consolidated performance reports. While all alternative platforms provide standalone performance reporting, many do not provide an automatic data feed that would enable an RIA to import performance data into its reporting software of choice.

Product sponsors and managers are also struggling with how to best use the new platforms. They see a huge untapped market of investors, but is being on one platform enough? Or do they need to be on two, three or all of them? How do they decide?


“There will always be some advisers who prefer to do things in an old-fashioned, pen-and-paper way,” says Roth, “but the reality is that, as the next generation of clients gains or inherits wealth, they will expect, as a baseline, highly integrated, digitally enabled experiences for all the financial services they consume. The advisers who can deliver those experiences will have a substantial advantage over those who can’t.”

Other advisers are also looking to the future and using fintech platforms to grow.

“We have found that having access to these top-tier funds has helped us grow our business,” says McCullough. “Going forward, I would like to see these platforms include more boutique and emerging products. I want to catch a manager when they are in the $50 million to $250 million range. Returns typically begin to suffer as you get bigger. Right now, the offerings are pretty standard.”

As with any emerging industry, there is significant variability between platforms in terms of overall quality and how seamlessly they can be integrated into advisers’ existing operations. There will undoubtedly be successes and failures, mergers and acquisitions, bullseyes and misses.

“Ultimately, however, the success of the new retail alternative investment platforms will turn on whether they can make their moving parts — including the underlying financial product, the technology and the ways in which both elements plug into an adviser’s existing business — work together effectively and seamlessly,” predicts Roth.


Sheila Hopkins is a freelance writer in Auburn, Ala.


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