It’s not just that Americans are living longer and saving less. Even those diligently working to secure their retirement are finding it harder and harder to achieve their goals. The status quo approach to investing for retirement is falling woefully short, and not just because interest rates are at an all-time low.
Outsized returns have all but disappeared from the public markets. At its height in the late 1990s, there were close to 8,000 public companies. That number dwindled to 4,000 by 2012 and only recently started increasing again, thanks in part to SPACs. Companies that used to go public are staying private longer, and the returns that were once available to the everyday investor have been funneled to institutional investors and those individuals with both the network and net worth to be included in these exclusive investment opportunities.
RIAs have an opportunity to level the playing field by sourcing, identifying and analyzing unique investment opportunities in alternative assets for their clients. Technologies are not only making it possible but are making the outdated processes and paper investment documents most often associated with alternatives a thing of the past. Alternative investment opportunities are more varied and accessible than ever before, and their typically higher returns and low correlation with conventional, publicly traded assets make alternatives an indispensable tool for diversifying clients’ retirement portfolios, reducing volatility and enhancing returns.
WHAT IT MEANS FOR YOU
Most RIAs have not had reason to familiarize themselves with alternative investments, given the strength of public market investing over the last 10 years. Nor have the majority of brokerages and custodians supported investments in unregistered securities. The document-based processes were time consuming and painstaking, riddled with regulatory uncertainties and resulting fee structures that few clients would consider worthwhile. When it came to investing in alternative assets, the question was “why bother?” versus “why not?” But that is changing before our eyes.
Technology, and the economical fractionalization and/or securitization of ownership it enables, is propelling a capital markets transition from “a tiny number of gigantic balance sheets to a gigantic number of tiny balance sheets.” New technology platforms are emerging rapidly, building a marketplace for alternatives that engages, educates and equips RIAs to confidently advise clients about alternatives as an asset class and how to buy and own them. Secure and inexpensive execution of alternative investments is not just possible, but increasingly easy as processing infrastructure evolves and innovative products open the market to accredited and not-yet-accredited investors.
This is an exciting time. Stakeholders are more aligned than ever as market forces coalesce around an industrywide drive to build and adapt to a digitized ecosystem for buying, owning and one day selling alternative assets. RIAs can no longer afford to ignore the trend. Fortunately, there are resources to enable RIAs to take an educated, strategic approach to using alternatives to rebalance and strengthen retirement portfolios to open new opportunities for client acquisition, service differentiation and development.
THE BIG OPPORTUNITY FOR ADVISERS AND CLIENTS
Among professional investors, pension funds and ultra-high-net-worth investors, a 10 percent allocation to alternatives is commonplace; for some individual investors, an allocation of 20 percent or more may be appropriate. According to Money Management Institute’s recent Retail Distribution of Alternative Investments study, most individuals have less than 5 percent of their investments allocated to alternatives. As always, asset allocation must align with each client’s goals, income, time horizon and risk tolerance. Still, that many are underinvested in alternatives presents a tremendous opportunity for RIAs to serve their clients more effectively by diversifying their portfolios to a 5 percent to 10 percent allocation, optimizing their returns to secure the financial futures they are seeking.
And clients are seeking more. Interest in alternative investments has been growing steadily over the past decade. Mainstream media’s ceaseless coverage of cryptocurrency has raised awareness that there are options to consider, even for the risk-averse investor. Seeing older generations struggle to afford retirement likely contributes to a broad shift in retirement planning behavior by millennials, who are driving the rising number of IRA accounts and the tax-exempt balances within them. At the same time, this younger generation is savvy to the limited returns being generated in the public markets, not to mention the limited options available. They are looking to invest in alternatives and want advisers who can support them.
These phenomena are converging to revolutionize not just the alternative asset market, but the way Americans — and not just high-net-worth ones — think and go about funding their futures. Today, we are seeing:
- Increased interest in alternative asset classes
- A rise in both the number of IRAs and their tax-
exempt balances
- Expanding technologies that provide unprecedented access to alternative investment opportunities that rapidly improve the operational efficiency of doing so, including with self-directed IRAs
In the United States today, more than $32 trillion is locked in retirement accounts, $11 trillion-plus in IRAs alone. Now is not only the time to get educated about investing in alternative assets; it is also a time to think strategically about putting those trillions of tax-advantaged dollars to work for your clients. The illiquidity and higher yields of many alternative assets align with the long-term investment horizon of tax-advantaged IRAs. Get to know the growing variety of alternative investment opportunities out there and how to access them so you can best advise clients and determine an allocation that suits their retirement goals, time horizon and risk tolerance. Financial technologies are forcing a paradigm shift in how and what we invest in. Market forces, social trends and demographic changes are reshaping the way we plan for retirement. RIAs can differentiate themselves not only by providing greater access and a larger variety of investment opportunities, but by demonstrating the knowledge and initiative to advise clients how best to secure the financial future they desire.
With built-in robo adviser capabilities free to the public market investor, now is the time for RIAs to embrace alternative assets and show clients a more robust, personalized wealth-building strategy. Thanks to technology, superior returns from private equity, venture capital, private credit, cryptocurrencies, real estate and securitized collectibles such as art, automobiles, watches and even Michael Jordan sneakers are no longer exclusive to the ultra-high-net-worth individual.
Tomorrow’s retirement won’t look like yesterday’s retirement. In fact, we likely won’t be talking about retirement 10 to 20 years from now — we will be talking about freedom and choice. Meaning, what kind of financial plan must I put in place today to enable the freedom to choose how I spend my life tomorrow? With new technology platforms making it simple and inexpensive to access opportunities and invest in alternative assets, the real question is, why wouldn’t RIAs start using them?
Eric Satz is founder and CEO of Alto, an alternative asset investment platform.