4 Questions to Ask About Alternative Investments and Wealth Tools

October was the best month for the Dow since 1976, while November also produced broad-based gains. But the recent advances don’t negate what has otherwise been an awful year for the markets, which have been bludgeoned by rising inflation and high-interest rates worldwide.

Through the first 11 months of the year, all the major indexes are well off all-time highs, led by the tech-heavy Nasdaq, which shed 27% in 2022. Notably, bonds have provided little relief, bucking historical trends by moving in tandem with stocks.

Against this backdrop, the findings of a recent study by Broadridge Financial Solutions are hardly surprising. The firm found that 72% of financial advisors use alternatives in investor portfolios, a 13-point jump from the first quarter of this year.

For firms and advisors, the growing embrace of alternatives highlights the importance of having access to a wide variety of such products from which to choose. Indeed, clients have different needs and risk thresholds, so finding the right fit is vitally important.

But an equally important consideration is whether your technology platform is “alt friendly” enough to make all the pieces to a client’s investment and financial planning puzzle fit together.

Here are four questions to consider about your current or prospective tech solution.

1. Can it handle alternatives?

When it comes to alternatives and tech, integration is critical. But there are different levels of integration. Some platforms claim they can incorporate alternative products, even though they provide advisors with nothing more than a surface-level view.

In other words, you can see a client’s account balance and performance data, but getting and transferring information beyond that requires going to a different platform. Not only can that be a lengthy, drawn-out process, but it can lead to a host of errors and faulty assumptions.

2. What type of analytic information does it provide?

Consistent with the above, the more data a platform can gather about specific investments, the better. Consider private equity funds. They have years-long, staggered distribution schedules.

For clients, this can have a pronounced impact on their liquidity and available cash flow, especially if they have millions of dollars tied up in them. If your technology platform doesn’t appreciate that dynamic, it complicates the planning process significantly.

3. What is the quality of the risk tools?

Many of your clients crave alternatives because they want the opportunity to realize gains that may not be available in the equity and bond markets. Others use them to diversify and reduce risk, which is why risk contribution metrics and scenario analysis capabilities are a must.

For instance, you should be able to show clients, ”If you invest in product A and the market goes down 15%, this is what will happen to your portfolio.”

4. Is it business-model agnostic?

Over the years, an increasing number of advisors have become committed fiduciaries. Product sponsors have responded to that shift by designing vehicles that, while not liquid, have higher levels of liquidity than traditional alternatives.

That said, a range of energy and real estate-based projects with a history of producing solid returns — but which have long time horizons and thus require long lock-up periods to be successful — can only be accessed via a broker-dealer platform.

So, as advice-based models continue to gain favor, firms must remember that commission-based products are not irrelevant, even for many high-net-worth clients. That puts the onus on having a tech solution that can accommodate both advice and broker-dealer work.

The best technology solutions in this industry will never replace what you do. Instead, they make your job easier. Part of that is streamlining tasks that would take hours — if not days — to do manually.

But the other part of that equation is providing access to tools and capabilities that facilitate better, more meaningful conversations with clients and, ultimately, improve the planning process. And in today’s world, no platform can purport to do without fully supporting alternative investments.

Andy Aziz is the chief strategy officer with d1g1t, a Toronto-based enterprise wealth management platform.

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