It used to be that if you wanted access to best-in-class investment strategies – particularly in the alternative investment space through private equity, hedge funds, real estate, or venture capital - you could only get it through global banks and large brokerage firms. For that to happen, you generally needed to be an ultra-high-net-worth individual (>$30 million assets under management, or “AUM”), a family office, or an institutional investor like an insurance company, sovereign wealth fund, or pension fund. A recent Bain & Company report shows that as of 2022, 84% of AUM held by alternative investment funds came from these types of investors.
The private wealth market commonly served by boutique managers — high-net-worth individuals and families with less than $30 million AUM, smaller foundations, and endowments — often could not meet the steep investment minimums that enabled access to this universe. The dynamic is now changing.
Private wealth accounts for 16% of AUM in the alternative space, according to Bain & Company. However, it represents a remarkable 50% of the estimated $275 trillion to $295 trillion of total AUM. This divergence means alternatives are significantly underrepresented in the private wealth space, which presents an immense opportunity for alternative investment managers.
On the one hand, alternative managers could just continue to tap the half of global wealth that already represents 84% of their business. However, the institutional market presents challenges due to its maturity, competitiveness, and the fact that many institutional investors have already reached or are close to their target allocations, rendering this option less appealing.
That leaves the other half—the private wealth market. Historically under-allocated, this segment is now hungry to take advantage of opportunities previously inaccessible to them. Not surprisingly, investment managers are increasingly shifting their focus to this group, even tailoring their products to meet their specific needs, such as lower minimums and more frequent liquidity options.
Investment managers aren’t just opening the door for private wealth investors, they are rolling out the red carpet.
Alternative investments: A key component of asset allocation
Alternative investments diversify the opportunity set of an investor’s portfolio and the strategies used to generate returns.
Consider private market alternatives. According to the Center for Research in Security Prices, the number of public companies has fallen more than 50% from its peak in 1996, from over 8,000 companies to approximately 3,700 companies today. Per Bain & Company, “fewer than 15% of companies with revenue over $100 million are publicly held.” For investors to get the widest exposure possible to the economy at large, a private market allocation needs to be considered.
Many alternative investments also employ niche strategies from skilled managers not easily replicated through just buying and holding public equities and bonds. Whether it’s access to the growth of emerging technologies and markets, the higher income of private credit investments, or the volatility dampening of long/short hedging, increasing the mix of differentiated return drivers can smooth out a portfolio’s performance over time.
The shift to private wealth has been facilitated by government regulation and technological innovation. Recent law changes like the 2012 Jumpstart Our Business Startups (JOBS) Act passed by Congress and the 2020 expansion of the “accredited investor” definition by the U.S. Securities and Exchange Commission (SEC) show that the government is willing to open more roads to investors while ensuring that guardrails are still in place. FinTech companies have created products that provide cost-effective distribution, compliance, and reporting so that wealth management advisors can spend their time on the value-added service of screening opportunities for their clients rather than being bogged down with administrative duties.
The opportunity to capture private wealth capital is big, and it is not lost on the large firms. The Bain & Company report states that, “Blackstone sees potential to expand retail capital from $200 billion to $500 billion, KKR expects between 30% and 50% of new capital raised over the next few years to come from the private wealth channel, and Apollo seeks to raise $50 billion in retail capital cumulatively from 2022 through 2026.”
What does this mean for high-net-worth investors? It means they can take their business to boutique wealth management firms and get the same access to the top-tier alternative investment offerings that large firms offer.
But, if the offerings are the same, why would they choose a boutique manager over a large wealth manager? To get what large firms can’t offer – customization, personalized attention, and white-glove service.
There is a void in the “advisory” business
Investment performance is a critical part of a financial plan, and as we’ve discussed, it is important that the opportunity to participate in that performance has been democratized. However, the number one thing clients gain from working with boutique private wealth firms is customized advice. Not just advice on their investments, but on their entire financial picture – securitized lending, financial planning, estate planning, asset protection and philanthropic needs. Every client is different, many are complex, and they can only have their goals truly met by working in partnership with a Wealth Advisor who listens, understands, and has the experience and resources to devise and execute a customized, holistic plan.
Unfortunately, many clients aren’t getting the advice they need. According to the J.D. Power 2023 U.S. Full-Service Investor Satisfaction Study SM of more than 6,000 investors, only 11% said their advisors are providing "comprehensive advice," with 47% classifying the service as simply being "goals-based," and 42% describing it as “transactional.” Even more shocking is that 32% said they don’t think their advisor’s recommendations are in their best interest.
Additional data from CEG Insights research shows that 40-50% of surveyed clients are dissatisfied with various aspects of their advisor relationship, raising questions about their advisor’s understanding, thoroughness, communication, and trustworthiness.
Relationship problems…and opportunities
When we launched Clarendon Private, we chose to be “boutique” because we believe sound, holistic advice is what private wealth clients sorely need, and are lacking, from the marketplace. We understand that client service is the greatest differentiator, and we deliver it by staying lean, agile, and focused on the demographic of clients that we have deep experience serving.
You don’t have to choose between investment access and client service
With today’s technology, Clarendon Private can access the same top-tier investment solutions as large firms and offer them as part of a thoughtful, risk-appropriate allocation to a client’s particular asset portfolio.
We also offer our clients an unbiased and unconflicted relationship with a dedicated team of specialists who can help them organize, manage, and optimize their finances with a customized plan that is tailored to their unique circumstances and goals.
We believe our boutique model solves these two client problems – investment access and client service – and that our clients no longer have to choose what is most important to them. They can have both. They deserve both.
