When investors think of investments outside of stocks and bonds, often the first thing that comes to mind is real estate. Real estate is the largest segment of alternative investments, making up nearly one-third of the market. But research suggests that, despite high interest, registered investment advisers’ clients are underallocated to real estate — especially private real estate investments.
In a 2018 survey by MLG Capital, 93 percent of RIAs reported that clients ask about real estate at least quarterly. However, in that same survey, only 27 percent of advisers said they proactively allocate discretionary client funds to private real estate. Investors that are invested in real estate are mostly allocated to publicly traded REITs — a $2 trillion market — which are highly correlated to the stock market, negating one of the sought-after benefits of real estate investing.
“Our research uncovered a major overarching theme. Investors ask their RIAs about private real estate constantly. RIAs believe their clients should be invested in private real estate, and they believe it has a low correlation to the public market. However, few are investing in it at present, primarily because they don’t know where to find information and/or have not seen the data,” says Timothy Wallen, CEO and principal of MLG Capital.
Between 2018, when that survey was released, and 2019, investors increased their allocations to real estate by 15 percent. RIAs have reportedly increased their use of alternative investments due to recent public market volatility and fear of missing out on returns, but the gap between investor interest and RIA use of these products is still wide.
Why are RIAs so reluctant to utilize real estate alternatives when demand is so high?
Advisers say private real estate funds are difficult to source, conduct due diligence on, and come with a heavy administrative and operational burden. One-third of RIAs report such funds are highly challenging to administer. Only 5 percent claimed they were easy. The top complaints when it comes to administering real estate investments revolve around paperwork processing, reporting and compliance.
While administrative work taking advisers away from client-facing activities is bad for business, there are risks to not considering a diverse range of investment types. In an article penned for WealthManagement.com, Milind Mehere, CEO of Yield Street, wrote, “I believe advisers risk doing their clients’ portfolios — and their own careers — a disservice by not pursuing viable solutions to clients’ investment needs. With investors and regulators alike focused on holding the industry to a higher fiduciary standard, it’s time to get comfortable with alternative investing.”
Ryan Gunn is digital marketing manager at WealthForge.