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Independent Financial Advisors are Using Alternative Investments to Increase the Valuation of their Business

With the possibility to increase AuM, the stability of the cashflow, and a scalable operational process, independent financial advisors are using alternative investments to build a more sustainable business that demands a higher valuation.

October 31, 2019

Increase Your Firm's AuM with Alternatives

The larger your firm is in terms of AuM, the higher the multiple you can achieve in a sale. However, It’s not only about AuM, but also an efficient client base – fewer clients with higher average account sizes.

Grow your AuM & your Average Account Sizes

Advisors looking to tap into the high net worth market must differentiate themselves from their peers and articulate their unique value proposition to potential clients. The ability to provide a broad and diverse array of investment solutions is common among sophisticated financial advisors with the top 5% of practitioners – those who earn at least US$1 million in income in each of the last three years – exhibiting more extensive capabilities than their counterparts, especially with respect to key alternative investments¹.

The higher the net-worth of the client, the greater the weighting towards alternative investments in the client’s portfolio. See the chart below illustrating the asset allocation of these clients:

Asset Allocation Profiles for Ultra High Net Worths, Pensions & HNWS².

Asset Allocation, % of Total

Independent Financial Advisor Asset Allocation for Ultra High Net Worth Chart

Crystal's private equity and hedge fund platform helps advisors differentiate themselves and align their offering to what UHNW & HNW investors demand, which includes tailor-made portfolios of institutional alternative investments funds. Offering high caliber alternative investment opportunities in a customized fashion can successfully increase your RIA's average account size and increase AuM, resulting in improved margins, EBITDA growth and increased RIA valuations.

Bring Stability to Your Business

Alternatives generally dampen the volatility of the overall portfolio, but as a result of their less liquid nature and the fact that they are difficult to value, they also dampen the volatility of your AuM.

Reduced Portfolio Volatility

Adding alternatives with lower correlations and absolute return mandates help reduce clients’ overall portfolio volatility, which to many advisors, means it helps dampen the volatility of your AuM. Extreme market fluctuations are driven by human emotions. During a financial crisis, investors notice substantial declines in many of their holdings. Scared that there is no bottom in sight, many investors panic and sell – usually at the worst possible time. A portfolio that exhibits lower volatility can help mitigate these dangerous swings in investor sentiment³.

Private Assets are Not Priced Daily

Because many private equity transactions are non-public in nature, industry pricing usually occurs on a monthly or quarterly basis versus a daily basis. Their values are likely to remain more stable over time, since their pricing is not updated, or “marked to market,” on a regular basis like publicly traded securities.

Private investments mitigate risks related to the behavioral biases associated with public market investing, and as a result bring stability to your assets under management⁴.

Create a Scalable Infrastructure

A crucial factor to maximizing your firm’s valuation is its infrastructure and ability to scale. As your client base and assets increase, your firm must do so along with it. Review your menu of services, the expertise of your team and your own core processes. The more you’re able to show that your business can evolve and grow with the marketplace, the less risk any buyer will see in acquiring your business. Do your repeatable processes and systems allow the firm to run without you? The more you can make yourself replaceable, the more you’ll see your valuation increase because of the independent nature of the firm’s viability.

Your Outsourced Alternatives CIO

Financial advisors are refashioning themselves as generalists, extending their capabilities to include a robust range of investment offerings, as well as advanced financial planning and lifestyle support. They achieve this by creating a network of outsourced specialists who can help them deliver on a variety of complex strategies, rather than exclusively focusing on a single in-house approach which can be inefficient and costly to modify. This outsourced approach helps them create a foundation of core processes, scalable systems, talented and experienced individuals and a proven value proposition.

There is a tremendous amount of work required to successfully manage subscriptions, redemptions, rebalancing, liquidity, capital calls, distributions, statements, K-1s and other key operational requirements that go into building and maintaining alternative investment portfolios for clients.

Advisors must be equipped with all the qualitative and quantitative tools required to navigate the complex alternative investment journey for their clients; which means that intelligent portfolio optimization, manager research, comparative analytics, consolidated reporting and client-facing deliverables should all be seamlessly integrated.

Crystal's turn-key solution is designed to help advisors focus on growing their advisory business, while we take care of their alternative investment needs. Our platform addresses alternative investing as it relates to access, technology, research, reporting, operations, administration and advisor support.

Our experienced investment committee utilizes their expertise and deep network to identify managers that meet our stringent due diligence requirements – choosing from the industry’s most exclusive managers - those with a proven track record, a dedicated risk management process, deep teams and institutional safeguards.

Our manager selection process is neutral and conflict-free, as we are not compensated by any of the managers in the program. Our seasoned team helps advisors monitor clients’ actual portfolios in response to new investor subscriptions, redemptions, and/or changes in objective requirements, providing a very customized investing experience.

Recognizing that investing in individual feeder funds is time consuming and overwhelming, we have simplified the process of subscribing to multiple funds by offering a single one-time electronic subscription document. Clients, in turn, receive a consolidated account statement, audit and K-1. Crystal is fully integrated with the major custodial platforms and data aggregators.

Our in-house team of 20+ professionals — with diverse backgrounds in investments, operations, technology and marketing — takes a personal and hands-on approach to supporting financial advisors through every step of their alternative investment journey.

Partner capital represents 8% of firm AuM, creating a unique sense of synergy based on direct alignment of interest. Our platform is privately owned and truly built by investors for investors. Yours and your clients' success is our success.

Sources:

  1. Forbes, March 5, 2018
  2. All About Alpha, February 2, 2018
  3. Crowd Matrix
  4. UNIVA Capital, 2017

Increase the valuation of your RIA business.

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