Would the gold rush of the mid-nineteenth century, when only a handful of the 300,000 people who flocked to California became billionaires, have turned out differently if the fortune seekers had retained financial advisers?
We'll never know, but it's safe to say that financial advisors have a big role to play in ensuring that the latest move that could herald widespread wealth creation benefits more than just the lucky few.
Over the past few years, the push to open up private equity, private credit and other alternative investment strategies to individual investors – the 'democratization of private markets' as it has been called – has gained real traction. At the heart of this movement is the wealth advisory industry, serving as the link between investment firms trying to capitalize on this new profitable channel and the investors they are trying to reach.
The way this opportunity has been communicated so far has been twofold. On the one hand, much of the story is about the riches on offer. Put more bluntly, the conversation has been about how individuals can invest like the 1% – and reap similar benefits. The second major area that clearly comes across in the way the media is covering the topic involves the risks inherent in private markets strategies—lack of liquidity, high fees, etc.
In the latter, wealth advisers have an important role to play in ensuring that their clients make sound decisions based on knowledge and awareness of the risks as much as, if not more than, the potential rewards.
In new explorativewe found that less than half of media coverage on the topic of democratizing private markets mentioned the risks involved—48%. In media dedicated to the counseling community, this was even lower, with only 43% coverage (vs. 74% in mainstream news media).
Advisors should have honest conversations with their clients about the downsides of private market investing and potential returns. We have already seen situations where private market firms have been heavily criticized for failing to meet repurchase requests, not because they were in any way to blame, but because the investor base was not familiar with what they could expect.
More fundamentally, the wealth channel needs to get better at understanding the lay of the land – who are the key players and what are their differences? Making their push into this emerging territory, private markets firms have been bullish on education, particularly as it relates to the opportunity and positive potential of the asset class.
But the signs are that, to date, this is not translating into detailed market knowledge from the people who need to know – the customers. Various surveys of advisors and high net worths have highlighted a widespread lack of knowledge about investment brands in the market, let alone what those brands stand for or do particularly well.
This is likely because, despite the growth on the supply side, the opening of private markets to individuals is still a relatively new movement. As such, it remains somewhat uncharted territory for wealth advisors and more so for their clients. Private market firms continue to provide education to financial advisors and end investors, but it is more important that financial advisors apply that knowledge to client portfolios and results-oriented advice. After all, private market investments are ultimately another vehicle for advisors to deliver against client goals.
Wealth advisors would not put their clients into funds or products from traditional asset managers without rigorous research along with trust that has been built up over many years.
The latter can only develop over time. But the information gap is likely to be filled, at least in part, by legacy industry data providers who are already well-versed in evaluating public market funds and products and are beginning to push into the private markets as well. This should help wealth advisory firms have the tools to help their clients make better overall portfolio decisions.
Meanwhile, wealth advisors should not be shy about seeking this data directly from private markets firms. If private equity firms are serious about leveraging individuals for capital, they will have to become more accustomed to this greater scrutiny. There's no time like the present to start. Otherwise, this new gold rush will be just as wet as the original.
Dan Allocca is Partner, Head of Digital, Paid and Analytics at Prosek Partners.