Financial advisors are adding value by expanding their focus to include private markets.
From an investing perspective, allocations to private equity, private debt, real estate and various hedging strategies introduce levels of diversification different from the kind of broad market beta found in popular index funds. Plus, helping clients navigate such alternative strategies highlights the value of working with a financial advisor.
“I like alternatives as another way of diversifying and reducing correlation to the stock market, especially if we define the stock market as the S&P 500, which is essentially just a handful of stocks,” said Chuck Failla, founder and chief executive of Sovereign Financial Group. Failla, who defines alternative investments as “anything without a ticker symbol,” added that “alts are not for increasing return, they are more of a Sharpe Ratio play to reduce correlation to the public markets.”
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According to the latest CAIS Mercer survey of financial advisors, half are now allocating at least 10% of client assets to alternative investments, and three-fourths are allocating at least 5%. The latest findings suggest advisor demand for alternatives isn’t a passing trend, instead it’s a “structural shift,” said Brad Walker, president of CAIS. “We’re seeing advisors integrate alternatives as a core part of portfolio construction,” he added. “As technology and AI continue to streamline access, we expect these allocations to deepen even further.”
Matt Malone, head of investment management at Opto Investments, said the private investments evolution has moved the alternatives allocation from an opportunistic add-on to a calculated part of portfolio construction. “A few years ago, private investments often played a very limited role in individual portfolios; now, more sophisticated RIAs are building a defined private markets sleeve with a clear role,” he said. Specifically, Malone added, private credit is used for income and downside support whileprivate equity and venture capital are accessed for long-term growth with pacing and vintage diversification in mind. “We use real assets where inflation sensitivity or contractual cash flows actually matter,” Malone said.
In terms of how private markets exposure works inside a client’s overall portfolio, Ben Sayer, alternative investments group head at MAI Capital Management, said the alts can be separated into three categories. Depending on a client’s risk and return profile, Sayer said MAI might employ an income and low-volatility growth alternative strategy as an extension of a fixed-income portfolio. Growth alternatives can be used to enhance equity exposure, and real assets can be used as an inflation hedge, Sayer explained.
“We believe that all three types of alternatives can provide diversification and enhanced return potential, but the exact portfolio construction is dependent on client-specific goals,” he added.
According to the CAIS Mercer report, published in December, advisors using alternative strategies said in a survey that their most significant allocations were to private equity, private credit and real estate. Jen Wing, chief investment officer and head of investment solutions at GeoWealth, said alternative investments are becoming standard fare, especially for wealthier clients, and should not be ignored by advisors. “Private markets aren’t just an alternatives bucket anymore and leading advisors are using them deliberately inside the portfolio to diversify specific risks in public markets or add income or returns,” she said. “RIAs benefit from having a clear perspective and a practical way to implement these exposures when appropriate, and having no answer is no longer an option.”
The alternative investing trend is riding momentum from multiple directions, including an extended bull market in equities that has become increasingly concentrated and pricey from a valuation perspective. Another driver is the financial planning community viewing more sophisticated investing strategies as a way to stand out and justify value to clients.
Then there are the clients themselves, often requesting strategies that go beyond the plain vanilla index funds populating the country’s retirement plan menus.
While many alternative investments that include access to private markets are still limited to the wealthiest individuals and families, evolving technologies and innovation are making it easier for financial advisors to expose clients to those strategies.
According to the CAIS Mercer report, 77% of advisors use model portfolios for alternative investing, and 55% of respondents regard analysis tools as their most valuable technology feature.
David Allen Miller, founder of Rule72 Financial, said client demand for alternative investments is showing up in two different ways. “Higher-net-worth clients often begin asking about alternatives once they’ve crossed a meaningful milestone, commonly around $1 million in net worth of investable assets, and start to feel that everything should be open to them,” he said. “Other clients ask about alternatives for a different reason. They’re looking for a way to beat the market, and that distinction matters.”
Miller explains to clients that “alternatives are rarely about shoot-the-lights-out returns.”
“In well-constructed portfolios, their primary role is diversification and risk management, not market-beating performance,” he added.
While Miller lists one positive side of alternatives as reducing volatility drag when clients enter the withdrawal phase, he doesn’t ignore the potential downsides:
“Less liquidity, more complexity, higher fees, and the fact that alternatives can underperform traditional assets for extended periods.”
It is true that there are tradeoffs for the most sophisticated levels of diversification, which is why most of the access to private investments is limited to the wealthiest investors and institutions. “For clients with longer time horizons and tolerance for the illiquidity, complexity and tax considerations, alternatives can provide exposure to different return drivers and mitigate concentration risk,” said Scott Bishop, managing director at Presidio Wealth Partners.
Managing Risk. Joshua Nelson, founder of Keystone Financial Services, said even clients who aren’t familiar with specific categories of alternative investments are requesting the kinds of benefits the strategies are designed to provide.
“Most clients aren’t asking for private credit and real assets by name,” he said. “Instead, they want reassurance that their portfolios are being thoughtfully constructed and that we’re using all appropriate tools to manage risk and long-term outcomes.”
Ultimately, Nelson added, it comes back to a growing focus and concern about concentration risk spreading across much of the public markets.
“Clients want to know their portfolios aren’t overly reliant on a single market environment,” he added. “Alternatives can make sense in certain circumstances, particularly for investors with sufficient scale, time horizon and liquidity flexibility.”
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