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Charles Owen: Solving the Catch 22 of alternative assets

Written by Charles Owen | 30 November, 2017

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The asset and wealth management industry is predicted to almost double in size by 2025, according to a recent report by PwC, with global assets under management (AuM) increasing from $84.9 trillion in 2016 to $111.2 trillion by 2020, reaching $145.4 trillion by 2025.  PwC also predicts a big change in how these assets will be invested, with the share of passively managed assets and alternative assets set to grow significantly at the expense of actively managed funds. 

These trends, according to PwC, are driven by investors’ demand for more transparency in how their money is being managed, which is why the report also stresses the need for firms to embrace technology to help service this trend.  From the financial advisers’ point of view, whilst the technology surrounding passive management funds is well established, the issue of accessing alternative funds is not as straightforward.  How can adviser’s best cater to these new client demands against the backdrop of this fast-changing landscape?

Conflicting demands: More alternatives vs. more transparency

The PwC report, titled Asset & Wealth Management Revolution: Embracing Exponential Change, predicts that passive strategies will hit 25% of global AuM by 2025, compared to a current share of 17%.  Another key beneficiary of the changing environment will be alternatives funds, such as real assets, private equity and private debt, which will see AuM more than double in size, growing to $21.1trn and accounting for 15% of global AUM. Though continued growth in active management is predicted, it will be at a much slower level, reaching $87.6trn by 2025, or around 60% of global AUM, down from 71% in 2016.

The trend towards more passive investments, according to PwC, is being driven by investor demands for more transparency in how their money is being managed: "Investors...are seeking clarity as inexpensive forms of beta become easier to access. Greater transparency is revealing where asset managers add value, allowing institutional investors to more aggressively negotiate down fees for specific outcomes and retail investors to benefit from fee competition. What’s more, millennial generation investors not only distrust opacity but also prefer transparent ETFs."

The trend towards more alternative investments on the other hand is being driven by three key factors according to McKinsey: increasing adoption by retail investors, a shift in investor benchmarks from relative to absolute return, and the convergence of traditional and alternative asset classes, investment managers and products.  Unfortunately for investors and their advisers, alternative assets usually involve offline application and reporting processes making them much less transparent than listed investments and traditional funds.

Resolving the conflict: technology is key

From the point of view of a financial adviser, the technology surrounding ETFs and other passively managed funds is well established.  These products can be easily bought and sold using any online broker or through many existing adviser platforms that automatically connect with adviser back-office reporting systems.  These technologies essentially allow an adviser to quickly and easily see a detailed, holistic view of their client’s portfolio, including performance information, currency and geographic exposure, plus income and capital gains information.

Compared with passively managed funds, however, the technology surrounding alternative assets is almost non-existent.  These investments are usually not listed on a stock exchange and involve manual, paper-based application and reporting processes.  Once an investment is made, an adviser will typically track a client’s alternatives portfolio via an Excel spreadsheet, updating each one separately for any dividends received or changes in valuation.  A separate, manual process is then required to input any changes to the investment portfolio into the adviser’s back-office reporting systems.  Each manual step in this process requires extensive resource and introduces risk in the form of human error.  All in all, alternative assets are much harder for advisers to access, as well as more time consuming and expensive to monitor on behalf of their clients.

Fortunately, a new generation of digital platforms dedicated to improving access to alternative investments has emerged to help resolve the conflict between more alternatives and more transparency.  These platforms use the latest technology to connect alternative fund managers with private investors and their advisers, including automatic links to the advisers’ reporting systems.  Thanks to this forward-looking use of technology, an adviser can now access alternative assets via a digital application process meaning fund manager updates to valuations can feed directly through into the adviser’s reporting system.  This improves efficiency, significantly reduces the scope for human error, and gives the adviser unprecedented levels of standardised performance information for their clients’ alternative assets.

Tap the elusive

With the predicted increase in AuM growing at such an exponential rate, opportunities exist for firms to capitalise on this growth, especially in the area of alternative assets.  In order for firms to stay ahead of trends within this rapidly changing landscape, particularly in the area of providing transparency to investors, technology needs to be embraced across all types of funds - including management of the more elusive alternative asset funds.  

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