Articles | April 9, 2024

Private Wealth Managers: Master the Alternative Investments Learning Curve

One of the most consistent trends across the private wealth industry has been the continued demand for alternative investments. This demand has remained high even during periods of volatility seen in the capital markets since 2019.

For the last several years, all the stars aligned for a massive growth in allocations by financial advisors, including the continued generational transfer of wealth and an increase in the number of investment strategies available. However, despite the amount of discussion of this topic, many advisors have small allocations to alternative asset classes.

Private Wealth Managers: Master the Alternative Investments Learning Curve

Currently, just 5 percent of assets under management in alternative investments are held by individual investors, according to a 2023 Bain & Company report on private equity. The majority of advisors believe that alternative investing allows advisors to differentiate their practices from their competitors, attract high-net-worth clients and consolidate and retain assets under management, according to a report by Cerulli Associates, Invesco and the Investment & Wealth Institute. Yet half of the advisors surveyed by Cerulli reported an alternative allocation of 5 percent or less even though the surveyed group overall said that 13.3 percent was the optimal alternative asset allocation.

What could encourage wealth managers to suggest their private wealth clients increase their allocations to alternative investments?

The benefits

The reasons for a wealth manager to offer alternative investments to their clients are compelling both from portfolio construction and practice management perspectives. Where alternative investments would be appropriate, based on a client’s risk tolerance and time horizon, options such as private equity and private real estate can provide a diversification benefit and enhance the portfolio’s risk-and-return profile.

Being able to credibly offer alternative investments may require transformation of a firm's wealth-management practice. Driven by continued growth of the capital markets, the generational transfer of wealth and substantial liquidity events, such as the sale of a business, wealth-management firms are advising larger client accounts than ever before. This has created a heightened level of competition and many firms have responded by expanding their staff and the services they can offer to clients. Providing access to sophisticated alternative investments was at the top of the list of many firms when they decided to expand their service offerings. While only five years ago clients viewed the ability to allocate to alternative investments as a significant differentiator for a practice, they now see it as a requirement.

The practice-management impact of possessing a sophisticated alternative investment capability is far reaching. The ability to help a client build a successful alternatives program provides validation to the approach and can allow for that relationship to grow and produce client referrals. Most important, a firm with this capability can market these services and compete for additional business that requires a robust alternatives capability. In most cases, clients seeking alternatives expertise have a larger asset base, therefore developing the ability to engage these types of relationships will position many firms to grow their assets substantially.

The challenges

Many of the obstacles to investing in alternatives are well documented, including high fees, illiquidity and operational complexity, therefore, we will not dwell on these well-known and understood challenges. From our perspective, the initial and ongoing challenges for many financial advisors are:

  • Advisor education
  • Due diligence
  • How to source strategy knowledge across the alternative investment universe

This article addresses each challenge.

Business Black Woman Consulting With Finance Team Business Black Woman Consulting With Finance Team

Alternatives education

Advisor education is a topic that gets discussed as part of the use of alternatives, however its importance gets overlooked. Due to the complexity of alternatives, many experienced advisors are not as conversant in this space, which can bring any discussion on the topic to a grinding halt.

The reality is as important as it is clear: Advisors who do not feel confident and knowledgeable about investing in alternatives will not raise the topic with their clients. While advising on alternative investments may not be warranted for all wealth management firms, for the many where it is important, a dispassionate assessment of knowledge across their advisors is a critical first step. Wealth-management firms must implement a comprehensive educational process to help ensure their advisors are comfortable with the asset classes, unique characteristics and operating rhythm of alternative investments. Only then will a firm be prepared to credibly engage clients on this important topic.

Furthermore, clients new to the alternative asset classes also have a learning curve before they can comfortably invest in this space. Understanding concepts such as the J-curve and capital calls is vital for investors, as well as the impact many of these investments will have on the timing of their annual tax filing. Setting and managing client expectations cannot be overemphasized on this topic, as it can vary substantially from the traditional investment world.

Due diligence

The importance of comprehensive due diligence for alternatives cannot be overstated due to the opaqueness and complexity of many strategies. For most advisors experienced with the traditional asset classes, evaluating the alternatives universe presents unique challenges. Importantly, the due-diligence process is designed for the dual purpose of identifying the potential risks and advantages of a strategy, along with understanding if there is a differentiated approach that could outperform versus peers.

Operational due diligence is especially important for alternatives and requires an experienced person to fully understand the back-office aspects of an asset manager that differ from the evaluation of a traditional firm.

The performance dispersion between the top- and bottom-quartile managers in alternatives is wider than in the traditional asset classes, which underlines the importance of using a process aimed at finding the top strategies available for investors. As a greater number of alternatives asset managers make their services available to private wealth advisors, take a cautious approach to ensure that only institutional-quality strategies are presented to investors. The allure of investing in “institutional” alternatives should not allow any advisor to conflate access with quality.

Sources of alternative investment research

For private wealth firms, there are three typical approaches to providing due diligence and strategy recommendations in alternative investments:

  • Insourcing
  • External platforms
  • Research provider relationship


Insourcing alternatives expertise is simply hiring research staff with experience performing due diligence on alternative asset classes. The advantage of this approach is the research expertise resides in the same office as the rest of the team and is available to address questions as needed.

Businessman At An Office Desk Using Phone And Computer Businessman At An Office Desk Using Phone And Computer

However, there are several substantial disadvantages with this approach. Hiring research staff with sufficient experience in alternatives due diligence can be very expensive, especially when most firms will need a team of alternatives researchers to provide broad coverage of the alternative investment opportunity set.

External platforms

External platforms have grown rapidly in recent years. The two best known are iCapital and CAIS. These platforms allow advisory firms to access a set of alternatives strategies that they could not access on their own. In addition, the platforms have a digital interface that allows for the completion of subscription documents to be very simple.

Although the number of strategies on these types of platforms continues to grow, not all investment strategies are available, which can present a challenge if a client or advisor is seeking a specific strategy. In addition, the advisory firm is one of many clients of the platform, so the ability to customize the services the firm receives is quite different than having an insourced research staff.

Research provider relationship

A research provider is an external resource that has the expertise and resources to to give a wealth manager ongoing due diligence and recommended strategies based on the needs of each firm. Consulting firms are a popular option given their broad research capabilities. Segal Marco Advisors has the Advisor Solutions Group practice that provides these services to financial intermediaries globally. An advantage of this approach is these relationships can be flexible and be focused on the specific services and needs of the wealth manager. For alternatives, research strategy recommendations can be provided for as many or as few asset classes as needed, along with advisor education to facilitate client discussion and implementation. In addition, given the scale of the relationships many consulting firms possess across the asset-management industry, access to certain strategies and to negotiated terms can be a significant difference that is passed along to their private wealth clients.

If this option is appealing, choose carefully since firms’ capabilities differ. Be sure to look at the experience of the investing team and ask about turnover.

How to decide

For smaller firms with clients just starting to explore alternative investments, a more modest staff and resource commitment would be warranted. For those firms working with ultra-high-net-worth and family office relationships, a much larger commitment needs to be put into place through insourcing or a research provider relationship. For larger and more complex portfolios, these clients expect a firm to have the capabilities to design, implement and monitor a bespoke alternatives program that also addresses operational details, such as capital call management and custom reporting. Once those resources are in place, a firm can credibly compete for much larger opportunities and be able to successfully service these types of clients.

The inevitable dilemma


Once there is a successful implementation of alternatives across a wealth management practice, what comes next? Typically, this expansion of services opens possibilities to attract new relationships and expanded existing ones.

However, the ability to allocate to a set of alternatives managers, by itself, provides only a partial solution for many firms. For clients that are seeking to gain exposure to alternatives for the first time or are only invested in strategies recommended by the wealth manager, each solutions discussed must address that need well.

Team Of Professionals In A Meeting Smiling Team Of Professionals In A Meeting Smiling

The true challenge is created by a great opportunity: A new client opportunity with an existing allocation to many alternative investment strategies. Among the first questions the client will ask the advisor is how to evaluate the existing portfolio and determine how to proceed. Being asked that question is a very positive sign about the caliber of client an advisory practice is attracting. The answer can be difficult unless the wealth manager has access to an experienced team that knows many managers across the industry. Each firm needs to consider what type of resources need to be in place so they can answer with confidence.

Private wealth firms need alternatives expertise

From our perspective, data and information have never been more plentiful about alternative investments, yet there continues to be a lack of insight for many wealth management firms. Sifting through the plentiful information available does not get advisors closer to fulfilling their fiduciary obligations and arriving at appropriate recommendations.

The insight needed can only be provided by experienced researchers in alternative investments and each firm needs to decide how best to source that expertise for their practice. While the learning curve can be steep for many advisors, the ability to provide more robust solutions for some clients and elevate their practice is worth the investment of time and resources.

We are still in the early days of significant industry change; however, this movement is inevitable and will continue to gain ground and advocates as more firms realize the potential benefits.

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The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This article and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. On all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.

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