Adoption of alternatives rises sharply with higher net worth, according to an investor survey released Thursday by Goldman Sachs Asset Management.
Thirty-nine percent of investors with $1 million to $5 million reported using alternatives, rising to 63% for households with $5 million to $10 million, 80% for investors with more than $10 million and 91% for those with more than $20 million.
Private real estate is most used by individuals with less than $5 million in investable assets. For investors with more than $5 million, use often broadens to include private equity, growth equity and other alternatives.
Even though 56% of individual investors surveyed generally labeled alternatives as “high risk,” performance and diversification are the primary drivers for those invested in or considering investing in alternatives, suggesting that these concerns often diminish with experience, Goldman Sachs said.
Thirty-nine percent of individuals investing in alternatives rate them as less risky, compared with 73% of those who reported no investment in alternatives.
“Private markets are rapidly gaining traction well beyond institutional investors,” Kristin Olson, global head of alternatives for wealth at Goldman Sachs, said in a statement. “The challenge and the opportunity now lie in expanding education and creating solutions that meet investors where they are.”
Goldman Sachs Asset Management and 8 Acre Perspective conducted the survey between July 18 and Aug. 8 among 1,000 U.S.-based individuals with more than $1 million of investable assets and investors with upward of $30 million of investable assets. Survey participants were 25 or older and served as the primary financial decisionmaker in their household.
Significant Cash Holdings
Wealthy households consistently maintain high cash balances, the survey found, averaging 20% of net worth across all tiers.
This reflects disciplined spending habits — 95% of investors save monthly, averaging 18% of income. It also reflects a preference for preserving wealth and flexibility to maintain lifestyle and spending, cited by half of respondents.
Cash provides liquidity to cover taxes and home costs, which represent the two largest annual expenses, according to the survey.
Generational Differences
Ninety-six percent of millennial respondents reported familiarity with alternatives, compared with 57% of Gen Xers, 29% of baby boomers and 26% of older investors.
According to the survey, millennials’ interest in and allocation to alternatives is motivated by investment performance and access to innovation and distinct opportunities more than to diversification. Millennials allocate 20% to alternatives, compared with 11% for Gen Xers and 6% for boomers who do so.
At the same time, they commit just 27% to public equities, compared with 43% and 48% for Gen Xers and boomers.
Advisor Gap
Eighty percent of investors surveyed reported that they work with at least one financial advisor, but advisors seldom address alternatives in their conversations with clients, even though they manage on average 59% of investor wealth, Goldman Sachs said.
Only 41% of advised investors said they have discussed private markets with an advisor, whereas 69% said they have talked about tax strategies and 60% about exchange-traded funds with a financial professional.
For millennials, social media rather than advisors are the main source of information on alternatives, while boomers rely on traditional financial media as a source of information. Brand trust also matters: 86% of investors said they would be more comfortable using alternatives from a financial institution they know.
“Evolving product structures such as evergreen and open-end funds are lowering barriers to private markets,” Kyle Kniffen, global head of alternatives for third-party wealth at Goldman Sachs, said in the statement. “Education is essential as these strategies take a more central role in wealth portfolios.”
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