A Case for Alternative Investment Platforms for Independent Advisors
- In recent years, more financial advisors have made the jump to start their own independent practice, as they look to gain more control and provide customized portfolio solutions for their clients.
- Alternative investments originally gained popularity through the Yale Model or the Endowment Model, developed by the late David Swensen and Dean Takahashi.
- After understanding the need for alternatives in client portfolios, the follow-up question would be: “how do I invest in alternative investments for my clients?”
With more advisors making the move to be independent and needing the infrastructure for alternative investments, Crystal looks to provide advisors and their clients with a turnkey alternative investment platform.
For Financial Professionals Only
Alternative investments have evolved from a buzzword in the investing world to a must-have for many registered independent advisors (“RIAs”) in order to deliver a comprehensive portfolio solution. While traditionally reserved for institutional investors, more and more high-net-worth individuals are allocating to the space. To cater to this growing demand for alternatives, advisors are looking for efficient ways to allocate to institutional funds and differentiate their practice.
At Crystal Capital, we seek to provide RIAs access to a curated list of institutional private equity and hedge fund managers through our alternative investment platform. Crystal’s alternative investment platform aims to provide clients with a turnkey alternative investment solution to create customized portfolios of private equity and hedge funds.
Rise of Registered Independent Advisors
In recent years, more financial advisors have made the jump to start their own independent practice, as they look to gain more control and provide customized portfolio solutions for their clients. RIA channels have grown to 64,743 advisers handling approximately USD6 trillion in assets, steadily eroding the market share lead held by broker/dealers (B/Ds). Over the last decade, RIAs' market share of advisor headcount has consistently increased, gaining 7.4 percentage points from 14.8 percent in 2009 to 22.2 percent in 2019.
Bernie Clark, head of Schwab Advisor Services notes:
Assets managed by independent advisors nearly tripled between 2009 and 2019. Why? So many reasons… the popularity of fee-based advice, the demand for and adoption of financial planning overall, and the increased awareness of the independent model. We see growth from new RIAs and existing RIAs, and, it still follows the 80/20 rule — 80% comes from advisors who are growing successfully and accumulating more assets in the marketplace, many from the traditional models, and 20% comes from “corner office brokers” going independent and bringing their teams with them.
Assets Managed by Independent Advisors Have Nearly Tripled in the Last Decade.
Note: CAGR = Compound annual growth rate. AS = Advisor Services. TDAI = TD Ameritrade Institutional. Source: The Cerulli Report, U.S. RIA Marketplace 2020. 1. Includes both independent and hybrid RIAs.
Trends for RIAs according to RIA Channel:
1. Desire for more autonomy on client accounts
2. Fewer conflicts of interest
3. Preference for fee-based advice
4. Recognition of independent advisor model
Cerulli published its 2020 report on the U.S. RIA Marketplace, discussing the trends, such as the growth of the RIA channel, and potential setbacks faced with RIAs. “Above all, breakaway advisors are drawn to the financial upside of independence,” the Cerulli report said. “However, they are accustomed to end-to-end operational support from a broker-dealer, which is becoming more readily available in the RIA space, too,” it noted, adding: “Consolidator models capitalize on breakaway advisors’ reluctance to build infrastructure and inclination toward turnkey independence. Their highly integrated model replicates wirehouse infrastructure within an independent framework, giving breakaway advisors the comfort of familiarity.”
Pros of Going Independent:
- More flexibility for client portfolios
- Closer alignment of interests with clients
- Lack of Infrastructure and resources vs. larger providers
- Need to differentiate practice from competitors
Given Regulation Best Interests—otherwise known as Reg BI—which has standardized conduct amongst advisors to act in the client’s best interest, many advisors need to find ways to differentiate their practices. One way in which this can be accomplished is by offering alternative investments.
Independent advisors looking to access alternative investments through a customized alternatives investment solution can utilize Crystal Capital’s platform to break into institutional hedge funds and private equity funds via a turnkey solution with end-to-end operational support.
The adoption of turnkey solutions, in general, has enabled advisors to focus more time on client relationships, witnessed in the 29% of advisors delegating investment selection to a third party vs. 10% in 2018.
Source: Wealthadviser, November 2020. “RIAs must capitalise on scale to compete.”; Charles Schwab, February 2021. “The RIA Industry: No one is staying in their lane, and that’s a good thing.”; Thinkadvisor, April 2020. “RIA Channel Growth Soaring as More Advisors Break Away.” ; The Cerulli Report | U.S. RIA Market Place 2020. RIA Delegation of Investment
Why Alternative Investments?
Yale Model = Base Case for Alternatives
Alternative investments originally gained popularity through the Yale Model or the Endowment Model, developed by the late David Swensen and Dean Takahashi, chronicled in Swensen’s book, Pioneering Portfolio Management. The model suggested higher portfolio returns can be achieved through illiquid products, such as alternative investments vs. liquid products, with returns being generated from the higher illiquidity premium and exploitation of market inefficiencies in illiquid markets.
Swensen ran Yale’s endowment fund, starting in 1985, and broke away from the traditional 60/40 split adopted at other universities. He pivoted the portfolio to alternative investments to capture the excess return from less liquid assets.
Yale Endowment's Asset Allocation
% share of investments by type
As of June 2020, the Yale Investment Office manages $31.2bn with the investment fund achieving a 12.4% annual return over the past 30 years, outpacing rival investors.
Yale’s Endowment has Beaten its Rivals Over the Past Decade
Growth of $100
Jul 1 2020 to Jun 30 2020 data
Source: Yale Investments Office
Search for Alpha in Current Market
Today's market environment continues to support the interest in alternative investments because historically low interest rates and the long-term effects of quantitative easing have reduced some of the return premiums available in traditional public markets, leading investors to hunt for alpha in other asset classes like alternative investments. Research firm Preqin predicts in their Alternatives in 2021 report that AUM in alternatives will grow to $17.1tn by 2025, compared to $10.7tn in 2020.
Alternative Assets under Management ($tn)*
*2020 figure is annualized based on data to October. 2021-2025 are Preqins forecasted figures.
The growth in assets for alternative investment stems in part from increased investor demand. Once considered a complex asset class only available for a small subset of investors, alternatives are now being included in more institutional individual portfolios as investors are recognizing the importance of diversified alpha.
According to Scott Nuttall, co-president and co-chief operating officer of KKR, known for their investments in private equity, credit, and hedge funds, “Alternative investments may be where the finest opportunities will be found in the future…Liquidity and simplicity are generally overvalued in markets,” he observes. “Where there is illiquidity and complexity, we prefer to hang out.”
After understanding the need for alternatives in client portfolios, the follow-up question would be: “how do I invest in alternative investments for my clients?” An initial web search shows that there is no shortage of options, ranging from fintech startups to seasoned asset managers. Solutions can also vary from single deal platforms to more comprehensive solutions. However, in the alternatives space, advisors need a way to streamline the operational process for allocating to the space.
Introducing Crystal Capital Partners
Our platform of curated funds and co-investments leverages our 25 years+ of industry experience to identify institutional-quality private equity and hedge fund managers at low minimums for advisors and their qualified purchaser clients. Crystal is not compensated by any of the managers on the platform, nor do we receive any placement fees for distribution of any fund.
Strong investor interest for alternative investments has prompted new managers to enter the space, taking advantage of the flood of new capital. Given the plethora of options for investors, we manage our alternative investment platform by seeking top-quartile managers so that RIAs can capture the excess returns in alternatives for their clients.
While the median manager's returns may be close to public market indices in any given year, top quartile managers can outperform bottom quartile managers by 10 to 20% per year, underscoring the importance of avoiding underperforming managers to outperform the stock market. While there is no guarantee to the performance of any manager on Crystal’s platform, our job is to find managers that have developed robust risk management frameworks, proven track records, and deep teams that are designed to navigate market volatility.
Average, Top Quartile, Bottom Quartile Performance of Managers
Source: CAIA Association, JPMorgan, Preqin, CISDM
Our client-facing investment proposals are highly visual and engaging and designed to help advisors easily explain the value alternatives can bring to clients’ traditional holdings. Sample PE Investment Proposal >
We make it simple for advisors to invest on behalf of their clients. We leverage technology to provide a streamlined subscription process and consolidated reporting (account statements, capital calls, distribution notices, and K1s), reducing the operational overhang with implementing alternatives. Our experienced team stands by to support you through the entire investment process.
Investing in alternatives is ongoing. Advisors can easily rebalance portfolios, manage upcoming liquidity requirements and track private equity calls using our proprietary portfolio management tools.
Because we are objective in our manager selection, we are continuously monitoring the firms and funds on our platform. We look for changes in personnel, fund style-drift, and character breaks among others, that may affect a fund’s future performance. If we detect any significant changes, we make sure to inform our network of advisors.
With more advisors making the move to be independent and needing the infrastructure for alternative investments, Crystal looks to provide them a solution that elevates their business. Our platform provides an opportunity to invest alongside institutional investors with a customized portfolio of top-quality managers.