A Rising Tide of Alternatives in the RIA Channel

Scott Kalish

‍Registered Investment Advisors (RIAs) play a pivotal role in financial markets by giving strategic investment guidance to individuals and institutions to better achieve their financial goals. Traditionally, RIAs have focused on traditional investment vehicles such as stocks, bonds, and mutual funds. However, in recent years, there has been a notable surge in the use of alternative investments within the RIA channel, according to a survey of RIAs, financial advisors, alternative asset managers and other industry professionals conducted by CAIS and Mercer. Moreover, nearly nine out of 10 financial advisors (88%) have indicated their intention to increase portfolio allocations to alternative asset classes over the next two years.

Diversification and Risk Mitigation

One of the key reasons for the growing interest in alternative investments among RIAs is the pursuit of diversification and risk mitigation. Alternatives, which encompass a wide range of asset classes such as private equity, real estate, and credit, offer unique risk-return profiles that are uncorrelated to the stock market and can simultaneously increase portfolio returns while lowering risk. By incorporating alternatives, RIAs can help clients diversify their investment exposure and reduce vulnerability to market fluctuations.

Enhanced Return Potential

Another driving factor behind the adoption of alternative investments is the pursuit of enhanced return potential. In an era of fluctuating interest rates and stock market instability, RIAs are exploring ways to increase alpha outside of traditional investment vehicles. Private equity and venture capital, for instance, have gained popularity due to their potential for significant capital appreciation over the long term. By offering access to these alternative investments, RIAs can employ previously underutilized asset classes and potentially generate higher returns for their clients.

Long-Term Investment Horizon

Alternative investments often exhibit characteristics that align well with the long-term investment horizon of many RIAs and their clients. While traditional investments are subject to short-term market volatility, alternatives provide investors the opportunity to take a patient and strategic approach. This longer time horizon allows RIAs to focus on the fundamental value of the investment, bypassing the short-term noise and focusing on long-term objectives.

Access to Unique Investment Opportunities

Another factor contributing to the rise of alternatives in RIA portfolios is the access to unique investment opportunities that were previously exclusive to select investors. Historically, alternative investments were available to high-net-worth individuals and institutional investors due to high minimum investment requirements and “word of mouth” opportunities. However, with the widespread adoption of digitally native alternative investment platforms, RIAs now have opportunities to access a wider range of alternative investments to provide their clients with greater exposure to previously inaccessible markets.

Further, alternative investments provide the opportunity for greater portfolio diversification and customization. Investing in alternative assets allows RIAs to better tailor portfolios to their clients’ specific needs, risk profiles and investment objectives. Specifically, alternative investments provide a broader set of investment vehicles, allowing RIAs to create well-diversified portfolios that are better aligned with their clients’ preferences and risk tolerances.

Challenges and Considerations

While the growth of alternatives in the RIA space presents numerous benefits, it also brings forth unique considerations. RIAs need to be familiar with the intricacies of different types of

alternative asset classes, perform thorough due diligence, and carefully evaluate the risk-reward profile of a given investment opportunity. As with any client investment, an RIA must ensure that an investment in alternatives aligns with their clients' risk profiles, investment objectives, and liquidity needs. Like traditional investment vehicles, effectively communicating the potential benefits, risks and time horizon of alternative investments is crucial to setting realistic expectations and building trust with clients.

As the financial landscape continues to evolve, the rise of alternatives in the RIA space is reshaping how RIAs construct investment portfolios on behalf of their clients. The pursuit of diversification, enhanced returns, and access to unique opportunities have led RIAs to explore alternative investments. While challenges exist, the incorporation of alternative investments can provide RIAs and their clients with a broader range of investment options, potentially improving investment outcomes and paving the way for long-term wealth accumulation. As the demand for alternative investments continues to grow, it is essential that RIAs adapt their strategies and appropriately utilize new platforms to best serve their clients' needs.

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