Growing interest among high-net-worth clients for alternative investment opportunities is putting advisers on notice that they’d best be prepared for an informed conversation about the emerging asset class and its place in portfolios.
Research commissioned by platform provider Praemium echoes findings of previous research conducted by HUB24 and CoreData about client demand for ESG and responsible investing options, which likewise found that it’s often clients that initiate investment conversations with their advisers, rather than the other way around.
Just as advisers can’t afford to dismiss client questions about ESG just because they don’t agree with ESG principles or know little about them, nor can they afford to be ill-informed about alternatives – demand is real and growing, and they need to be ready, especially if they’re dealing with high-not-worth (HNW) clients.
Alternatives include assets such as private equity, hedge funds, real estate and commodities, and Praemium chief strategy officer Denis Orrock says alternatives funds account for about a quarter of all new funds approved for Praemium’s platforms in the past 12 months.
Orrock says there’s now close to $6 billion invested in alternatives on the platform, following an increase of about 23 per cent in FY23, in a trend that has continued into 2024.
“We continue to see that breadth of offer expand, and a lot of that gets brought to us through advisers and their investors saying we want to invest in this fund,” Orrock tells Professional Planner.
He says a significant part of the demand for alternatives from HNW clients is driven by clients themselves: almost two-thirds (64 per cent) of high-net-worth clients uncover opportunities for themselves; and about 30 per cent will then rock up to their adviser to ask questions and seek validation.
Only one in five (20 per cent) HNWs have had alternatives recommended to them by their adviser.
“That’s an enormous opportunity, if you’ve got customers who are proactively looking in the market,” Orrock says.
“Now, some advisers might say, well, it’s not a great thing that they’re proactively looking at the market for that. But if they’re proactively interested, and they’re engaged in this side of the market, I think for advisers it’s a great opportunity to further differentiate themselves, and also make sure that they’re maintaining the majority share of the investable wallet from their customer as well.”
Praemium’s research suggests that HNW clients generally are more receptive to holding alternatives – about 17 per cent of HNWs hold them compared to 10 per cent of core affluent clients and 6 per cent of mass affluent clients.
HNW clients who hold alternatives are likely to have a good grasp of the importance of diversification, the relationship between investment returns and risk, and asset allocation. They’re likely to consider fees, transparency of investments and liquidity as important.
But a HNW client’s propensity to invest in alternatives is only an exploitable opportunity if an adviser is well-versed and educated in alternatives and how they potentially fit into a client’s portfolio. There’s an onus on advisers to know what’s going on, and how alternatives work.
“A lot of [education] is coming through from various providers in the market,” Orrock says.
“You’ve got a lot of large providers in the market. BlackRock have recently come back within the Australian market and set up an alternatives capability to bring to market, so there’ll be a lot of that style of education coming through.
“It’s about educating yourself on the type of instrument: what that means to a customer; how are you going to administer it; what’s the income stream on it; does it lock up capital for a period of time; is there a capital call down the track – how do I budget and manage that as well?”
