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Written by: Steven Brod | Crystal Capital Partners
The era of the traditional portfolio has ended. The 60/40, 40/60 and 80/20 allocation models have all underperformed or realized inferior risk-adjusted returns relative to portfolios incorporating alternatives, according to JPMorgan Asset Management.1 The portfolio of the future will likely include alternatives, whether that is private equity, private debt, real assets, hedge funds or a combination. What was once the domain of institutional investors is increasingly being adopted by financial advisors and their clients, including high-net-worth, affluent and even retail investors. While some advisors are adequately catering to this demand, Crystal’s proprietary research has found that many don’t know how to identify the best alternative investment funds for their clients and incorporate them alongside their traditional equity and fixed income funds. On top of this, surveys of investment preferences show that younger generations have a significant preference for alternatives and are willing to switch advisors if their needs aren’t met. With the U.S. undergoing one of the largest generational wealth transfers in history, it is crucial for financial advisors to understand alternatives to retain clients and attract new ones.
The demand for alternatives is growing. The industry is expected to grow to more than $24 trillion in assets in 2028 from $15 trillion in 2022, according to KKR.2 The investment bank Robert A. Stranger & Co. forecasts that alternative investment fundraising from retail investors will reach $115 billion this year,3 and tie-ups between traditional asset managers and alternative investment firms have been capturing media attention. Notably, BNY announced plans for a platform for advisors to buy and manage alternatives, while BlackRock collaborated with Partners Group and State Street partnered with Apollo to capitalize on the retail market.4
While some advisors are catering to this interest, many are still getting themselves up to speed. Crystal conducted two surveys of advisors on our platform this year. The first found that over 60% wanted to increase their exposure to private credit, but almost 40% said a barrier to demand was a lack of familiarity with the asset class. Similarly, the second found that 27% of advisors said their clients do not understand the differences between private equity sub-strategies, while 42% stated that the general lack of understanding or knowledge of the asset class as a whole was a primary barrier to demand.
Advisors should take note that younger investors are increasingly drawn to alternatives.According to Bank of America, three-quarters of individuals aged 21-43 believe that stocks and bonds alone no longer offer above-average returns, and 93% of them say they are likely to allocate more to alternatives over the next few years. They also believe that the asset classes with the greatest opportunities for growth are real estate, crypto/digital assets and private equity.5 These younger generations differ markedly from their predecessors in their values, risk tolerance and investment preferences. They are more financially literate, engaged in capital markets and expect technology-driven solutions that allow for real-time access and flexible portfolio management.
This shift is significant as an estimated $84 trillion is expected to transfer to Gen Z, Millennials and Gen X by 2045, as noted by Cerulli.6 To capture these new clients, advisors need to understand the sectors that hold the most interest for the younger generations, and that includes alternatives. Furthermore, research by Cerulli indicates that only 19% of affluent investors use the same advisor as their parents,7 underscoring the need for advisors to evolve. As wealth shifts to younger generations, it's clear that many will seek advisors who understand and cater to their specific investment needs.
To stay competitive, advisors must deepen their knowledge of alternative investments and how they can be integrated into portfolios to achieve optimal risk-adjusted returns. While many young investors are aware of alternatives like private equity and digital assets, they often lack the expertise to effectively incorporate them into a balanced portfolio. For example, they should be aware that alternative investments offer the potential for higher returns, diversification and access to novel assets like cryptocurrencies or impact-focused real assets, but that they also come with potential risks, such as illiquidity, higher volatility and elevated fees.
The future of wealth management is evolving, and financial advisors must evolve with it. The generational shift in wealth and investment preferences toward alternatives is undeniable and accelerating. Advisors who fail to adapt risk becoming obsolete as younger, more financially savvy investors seek partners who understand the complex landscape of alternatives. To thrive in this new era, advisors must not only deepen their expertise in alternatives, but also leverage technology and personalized strategies to meet the demands of the next generation. The stakes are clear: adapt or risk being left behind in the largest wealth transfer in history.
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1. CFA Institute, Dec. 2023. The 60/40 Portfolio Needs an Alts Infusion. https://blogs.cfainstitute.org/investor/2023/12/21/the-60-40-portfolio-needs-an-alts-infusion/
2. McVay, Henry. KKR, Sep. 2024. An Alternative Perspective: Past, Present, and Future. https://www.kkr.com/insights/alternative-perspective-past-present-future
3. Misonzhnik, Elaine. WealthManagement.com, Jul. 24, 2024. Alternatives Fundraising from Retail Investors on Track to Reach $115B in 2024. https://www.wealthmanagement.com/alternative-investments/alternatives-fundraising-retail-investors-track-reach-115b-2024
4. Masters, Brooke. Financial Times. Sep. 16, 2024. Firms jostle to sell alternative assets to wealthy investors. https://www.ft.com/content/b3ba8fb7-a2c6-44ba-a1f0-3340d410627c
5. Bank of America Institute. 2024 Bank of America Private Bank Study of Wealthy Americans. https://ustrustaem.fs.ml.com/content/dam/ust/articles/pdf/2024BoA-PB_Study_of_Wealthy_Americans.pdf
6. Cerulli Associates. U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021. https://s3.us-east-1.amazonaws.com/cerulli-website-assets/documents/Info-Packs/2021/Cerulli-US-High-Net-Worth-and-Ultra-High-Net-Worth-Markets-2021-Information-Packet.pdf
7. Cerulli Associates, Nov. 2023. Cerulli Finds Just 19% of Investors Use Their Parents’ Advisor. https://www.cerulli.com/press-releases/cerulli-finds-just-19-of-investors-use-their-parents-advisor