Alternative investments like private equity, hedge funds, and real estate have seen rapid growth in recent years, driven by institutional investors. However, alternatives remain a small part of most individual investors’ portfolios. Wealth managers face challenges in gaining efficient access to quality alternative investments and managing operational complexities. But with the rise of alternative investment platforms, wealth managers can now offer custom solutions to accredited investors looking for portfolio diversification and higher returns. By leveraging technology and expertise from FinTech platforms, wealth managers can capture the secular growth in alternative asset classes.
Increasing client demand and industry assets boost alternatives growth potential
Alternative investments have historically been dominated by institutional investors like pension funds, endowments and sovereign wealth funds. But accredited individual investors are showing growing interest due to record-low bond yields and stock market volatility. According to a BCG study, alternatives are likely to see $4 trillion of new individual investments by 2025. Within that, private equity could grow from $500 billion to $1.2 trillion of individual money over the next 5 years. This secular trend is driven by investor demand for diversification, higher returns and rising pressure on wealth managers’ profits.
Regulatory hurdles and illiquidity constrain direct alternative investing
Despite high investor interest, individual participation in alternatives like private equity has been limited by regulatory restrictions on minimum investment amounts and investor sophistication. Alternatives are also highly illiquid, with multi-year lockups and little reporting transparency. This makes them operationally challenging for wealth management firms without the proper infrastructure. Advisor training and amendments to regulation like the RIA Act could incrementally improve access over time.
Alternative investment platforms enable customized solutions
Wealthtech platforms like iCapital Network are bridging the gap between investors and alternative asset managers. They automate operations, account administration and reporting for PE/VC funds and hedge funds. Wealth managers can leverage these platforms to construct customized alternative investment solutions for clients. With lower investment minimums and increased liquidity through fund-of-funds structures, alternatives become more accessible for individual investors.
Partnerships with FinTechs allow wealth managers to capture expanding opportunity
By embracing alternative investment platforms, wealth management firms can realize synergies that benefit their business. Outsourcing non-core back office functions improves efficiency and lowers costs. Platform expertise supplements internal capabilities in manager selection and due diligence. Most importantly, the ability to construct tailored alternative investment portfolios and efficiently manage the asset class allows wealth managers to better serve clients and capture expanding industry growth.
Alternative investments present a compelling growth avenue for wealth managers struggling with margin pressure and volatile public markets. Although investing in alternatives like private equity involves more complexity, partnerships with specialized alternative investment platforms provide wealth managers with the technology, infrastructure, and knowledge needed to overcome key barriers. This enables delivery of customized alternative investment solutions to accredited investors seeking diversification and higher returns.