Over the next few years, it’s expected that alternative assets will become a larger part of client portfolios. Advisors will have to contend with a changing landscape especially as more products will be introduced that are more complicated in terms of taxes and reporting. 

A looming challenge for advisors will be handling the increased workload as well as understanding these products in a comprehensive manner in order to explain it to their clients. It’s likely that asset managers will form partnerships with RIAs in order to help them navigate and simplify the process. Already, some asset managers have started to invest in efforts to educate advisors, but more will be necessary given the increase in the number of options.

According to Ernst & Young America's Financial Services, some advisors will increase allocation to alternatives to 10% or more. In the near-term, private credit products will see the strongest growth as they are seen as less risky while offering higher yields than fixed income.

In addition to private credit, most exposure to alternatives currently is through liquid alt mutual funds, liquid alt ETFs, and publicly-traded REITs. Over the next couple of years, areas forecast to have the highest growth in terms of assets are cryptocurrencies, digital assets, hedge funds, private equity, and private debt. 

Finsum: The alternative assets space is expected to heat up in the coming years. One challenge for advisors will be to understand these products and handling an increased workload. 

Natixis Investment Managers and CoreData Research conducted a survey of 11,000 investors. One of the most interesting results was that those who were invested in model portfolios were less stressed, had more confidence, and trust in their advisors relative to individuals not invested in a model portfolio. 

11% of model portfolio clients felt stress while 23% of non-model portfolio investors were stressed. Similarly, 45% of model portfolio investors felt confident about their finances, compared to 24% of non-model investors. Further, 78% of model portfolio investors saw volatility as an opportunity. In contrast, only 47% of non-model portfolio clients felt the same way. 

Only about half of the respondents were invested in a model portfolio despite the benefits. Currently, about 51% of wealth managers and RIAs offer third-party model portfolios. However, it does present an opportunity for advisors as it frees up more time for financial planning, client service, and prospecting. 

Ronnie Colvin, the founder of Fractional Planner, said “Model portfolios make life easier for the advisor because the allocation percentages and the investments in the portfolio are predetermined. So the advisor doesn’t have to go and scour the market for various investments to fill a target allocation.” He added that model portfolios can help with managing risk while also leading to a more customized experience given that there are model portfolios optimized for tax efficiency, sustainability, income, and alternatives.

Finsum: Model portfolios offer certain advantages for clients and advisors according to a survey of investors. These include increased levels of confidence, less stress, and more trust in their advisors. 

Direct indexing is seeing a surge in popularity as it appeals to many investors due to its tax benefits and customization abilities while still offering low costs and diversification. Hearts & Wallets conducted a focus group in 3 cities across the US with investors to get their thoughts on the emerging strategy.

Direct indexing is essentially a variant of traditional index investing through low-cost ETFs or mutual funds. However, the major difference is that investors replicate the index within a separately managed account. This means that they own the actual constituents of the index which means that there are additional opportunities for tax-loss harvesting and personalization.

The focus groups were overall very favorable to the concept and more so than in previous years. Respondents seemed to be most attracted to its potential tax savings. In contrast, many were less enthused about customization given that it added a layer of complexity and seemed time-consuming. A small minority did appreciate the option of being able to avoid companies they don’t like.

Another interesting finding from the focus group is that it’s appealing to investors with less assets as well as high net-worth investors specifically for its tax savings. According to the firm, two-thirds is in taxable accounts, and this continues to grow at a faster pace than money in nontaxable accounts. Thus, advisors are likely to have the most success by stressing this benefit of the strategy. 

Finsum: Hearts & Wallet conducted a focus group of investors in 3 cities about direct indexing. It revealed that investors were most receptive to the strategy’s tax benefits.