Alt Investments
The Independent RIA Channel – A Completely Different Animal

This article examines the behavior of RIAs and how they use and interact with the alternative investments space.
The following article on the RIA channel comes from an
occasional contributor to these pages, Richard Hillson, a
consultant on the sector. He delves into the details of the
industry and how it goes about the job of allocating to areas
such as private equity, hedge funds and other alternatives. He
argues that there are still problems and barriers.
This news service is pleased to share these views and invite
readers to respond. The usual editorial disclaimers apply. Email
tom.burroughes@wealthbriefing.com,
jackie.bennion@clearviewpublishing.com
The sub-$500 million assets under management independent
Registered Investment Advisor (RIA) market is one of the most
untapped sources of capital in the alternatives space, if not the
single most untapped. Meanwhile, the independent broker dealer
community is thriving in the alts space. I am asked weekly why
that is.
Firstly, let’s look at why the IBD channel is the most targeted
by alternative product sponsors.
BD reps can typically earn 3 to 5 per cent commission selling
alts products. This makes it well worth reps learning the nuances
of the product and then educating their clients. If a rep can
recommend a Delaware Statutory Trust for a 1031 transaction, they
are essentially earning a commission on a whole pot of money
which they would never have had access to. Additionally, the BD
firm can usually request a 1 per cent marketing and due diligence
allowance which covers their costs and can often turn into a nice
profit center.
BD reps are also not always a fiduciary and therefore the
transactional nature of their business is very suited to the alts
space with high commissions, often paid by the sponsor. Some BD
reps make their living exclusively in the alts space, not
advising on any of the “core” funds.
Now let’s analyze why the RIA channel is oft neglected and why
advisors are less inclined to allocate to the alts market. I
heard some research at a recent conference suggesting that 2/3
advisors do not allocate to alts!
Advisors can charge the same wrap fee, whether the allocation is
to Amazon stock or to an alternative product.
This provides very little financial incentive to allocate to
something deemed to be more complex; requiring more client
handholding; and with a perceived higher regulatory risk. This
makes it very difficult for an advisor to get out of their
comfort zone.
As a fee-only fiduciary, the wealth advisor is not incentivized
by short-term transactional commissions and must take a long-term
perspective of what is best throughout the client’s investing
life cycle.
Decreased financial incentive coupled with increased regulatory,
investment and diligence risk that come with alternative
investments, so it’s easy to understand why smaller RIAs are
likely to maintain the financial planning status quo. Darrell
Habben Jr, wealth advisor, Mariner Wealth Advisors, [believes
that] alts products require a lot of education and therefore time
and effort to get comfortable with. It is not just about the
specific product or even the specific vertical within the space,
education and support are vital across the alts spectrum, to
understand the risk and diversification through lesser
correlation approach. Their clients need to know that
resources and not just an internal wholesaler’s job are a product
specific way.
Reporting, billing, and custody are often an issue in the alts
space. I regularly have conversations with advisors who will not
touch anything which cannot be held at TD or Fidelity. The
emergence of alts-friendly custodians has definitely helped
this.
“In recent years we’ve seen an increase in asset resignations
from traditional custodians who have merged and are not built to
custody alternative assets long-term which can create a
disruption for the investment sponsor and their investors. This
has also influenced alt-friendly custodians to invest in data
integration to provide a more cohesive experience for the
advisors," Lisa Rodriguez, director of institutional sales,
NuView Trust Company, has said.
However, the question /arises as to how the advisor can pull
feeds from multiple custodians for reporting and billing. This is
simply not an issue that the one-time commission BD rep has to
deal with.
Why we need to change this
Most experts agree that the equity market is overheated and long
overdue a sustained period of correction. The traditional advisor
model of 60/40 has become more like 70/30 in some cases due to
the underperformance of the bond market and advisors having no
choice between cash and equities for that part of the allocation.
This is exacerbating the overheating of the equity market.
It is essential for clients to have a diversified portfolio.
Diversified does not just mean stocks and bonds anymore. There
must be allocations to real estate, private credit, energy
sponsors etc. or clients are due a rude awakening in the very
near future.
The last few years have been monumental in the development of the
alts space. Quality alternatives are no longer the playground of
family offices and the ultra-high net worth but are now
accessible to the mass affluent market and in manageable
minimums. Clients are becoming aware of this and are now actively
asking advisors for products that they would never even have
heard of a couple of years ago.
What we can do about it
We need to remove as many roadblocks as possible and take away
every reason to say NO. This requires investment from product
sponsors and others offering support and platform services in the
space.
Custodians and reporting and billing platforms need to recognize
this trend and become more alts-friendly. We have seen product
providers digitize paperwork to some extent, but this needs to
improve. Existing alts custodians and support platforms need to
continue their crusade to make this marketplace more mainstream
and accessible.
The most limited, yet most important resource in this space is
education. Let me say one more time – education, education,
education! Wholesalers do a good job of educating around their
product or their vertical but that does not help a 60/40 advisor
who knows that they need to evolve or die but needs to understand
the alts market as a whole. And to help their clients understand,
to really crack this underserviced and untapped channel, sponsors
need to invest in more holistic alts education. We are talking
portfolio construction; dispelling the myths around alts; and
best practice to facilitate custody, billing, and paperwork more
easily.
The number one reason why wholesale reps' prospects/clients hang
the phone up on them is not their approach. It is because the
advisor is not comfortable with alts in general and may or may
not know they need to invest time and effort into this space. The
number two reason is that they believe that billing, custody and
reporting will be too cumbersome.
Add that to client paperwork and collecting signatures, and this
is daunting.
It is also imperative for product sponsors to approach this
market very differently from the IBD channel. Advisors need to be
provided with quality content as part of the marketing approach,
not just the typical exec summary, PPM, and intro call. Advisors
will absolutely read content about how they can use the alts
space to differentiate themselves from competitors, grow their
AUM and achieve superior returns for clients, as well as
insulating them from equity over-exposure.
I will never forget a due diligence event I attended a few years
ago where I met an RIA who had not allocated to the host sponsor.
During our cocktail hour conversation, it became very clear he
knew that he needed to grow his offering to clients but did not
know where to start. He also did not feel it appropriate to ask
the product wholesalers for help with his alts offering in
general. I ended up spending a week in his office educating his
team and clients individually. And guess what – they ended up
being a significant allocator to that sponsor and other products
in the space. And, how many wholesalers had he hung up on in the
preceding weeks ….
About the author
Hillson Consulting is a boutique investment consultancy founded by financial services entrepreneur Richard Hillson. The company helps independent advisors enhance and improve their offerings and drive revenue through alternative investments. HC also works with product sponsors to help them with education and access within the independent RIA channel.