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FAs Plan to Increase Alt Allocations Over Next Two Years

Investment Management

Amid ongoing market volatility and tightening monetary policy, a new survey finds that nearly 9 in 10 financial advisors (88%) intend to increase their allocations to alternative asset classes over the next two years.

The survey conducted by CAIS and Mercer also found that 89% of alternative asset managers and other financial professionals have identified the private wealth channel as a greater priority for their firm compared to two years ago. 

According to the findings, investors are increasingly turning to alternative investments to seek diversification, capital preservation, and/or uncorrelated returns. More than half of the 97 financial advisors surveyed (53%) are considering raising their alternative asset allocations to more than 15% over the next two years, while slightly more than a fifth (21%) estimate their alternative asset allocations will exceed 25%. Only 8% of respondents do not plan to increase their alternative asset allocations within the same timeframe, the survey found.  

“We are increasingly seeing advisors target a three-dimensional portfolio that more closely resembles a 50/30/20 model across stocks, bonds, and alts,” notes Matt Brown, Founder and CEO of CAIS. “These findings would seem to confirm that ‘The Great Reallocation’ of capital into alternative strategies is well underway within the private wealth channel.”

Citing data from McKinsey, CAIS and Mercer observe that financial advisors have historically under-allocated to alternatives compared to institutional investors, which often allocate between 30% and 50%.

Aside from a lack of liquidity, advisors cited high levels of administration (51%) and concerns around due diligence (42%) as some of the greatest challenges to adopting alternatives in their portfolios.

Additionally, three-quarters of the 101 asset managers and other investment professionals surveyed (75%) flagged a lack of education around alternative products and strategies as one of financial advisors’ greatest challenges in accessing alternative asset classes.

“These insights are consistent with findings from Mercer's Global Wealth Management Survey, which highlighted complexity and due diligence as critical considerations for investors that want to invest in alternatives,” observes Gregg Sommer, Partner and U.S. Financial Intermediaries Leader at Mercer. “The key is to provide independent financial advisors with the same research and resources currently available to larger institutions, especially when it comes to enhancing portfolio allocations and mitigating risk through private market opportunities,” he adds.

Meanwhile, as technology-driven platforms seek to enable more efficient access to alternatives for financial advisors, 85% of surveyed respondents confirmed that their clients are looking to invest in either new products or structures within alternatives, while nearly 6 in 10 (59%) said their clients are looking for both.

At the same time, nearly 7 in 10 asset managers and financial professionals surveyed (68%) revealed that their firms are rolling out these new investment products and/or structures to meet demand—including interval funds, 40 Act Funds, and non-traded REITS.

Financial advisors surveyed cited private equity (75%), private credit (73%) and real assets (71%) as the top-three alternative asset classes best suited to withstand current economic conditions.

The survey was conducted from Oct. 17–19, 2022, at the CAIS Alternative Investment Summit in Los Angeles, CA. Respondents included registered investment advisors (RIAs), financial advisors, alternative asset managers and other investment industry professionals. The data is based on responses from 198 respondents, 97 of whom identified as financial advisors.