Investment Managers Address Cracks in Alternative Product Development and Distribution of Alternatives

October 6, 2022 — Boston

Investment managers seek to integrate new teams and capabilities while servicing new client sets with a more complex offering

Both traditional managers and alternative investment managers have made significant investments to bring alternative offerings closer to wealth management clients. However, managers are experiencing internal challenges when it comes to distribution of these products, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.

After a wave of acquisitions, managers are increasingly focused on launching products and aligning distribution rather than acquiring additional capabilities. Revenue potential offered by alternative products is an attractive reason for offering them—among both traditional managers facing fee compression and alternative managers seeking revenue diversification.

Firms face barriers to the distribution of such offerings as the sales process for alternative investment is far more complex than that of the products traditional managers historically have sold. According to the research, the distribution of alternative products is a major or moderate challenge for nearly 70% of asset managers.

Product education—internal and external—is critical. As firms seek to distribute a product not previously offered, they will likely face both cultural and educational challenges. “The educational component cannot be overstated, especially with liquid and intermittent liquidity alternative offerings. The exposures are often complex and return profiles difficult to ascertain,” says Daniil Shapiro, director.

Lack of track record poses an additional hurdle to development and delivery, with 63% of managers reporting this as a moderate or major challenge. “This challenge likely is heightened by the large volume of product development activity for intermittent liquidity products,” says Shapiro. Other challenges cited in the research include technology implementation and culture clashes that can arise when smaller firms are brought into larger, less specialized organizations.

As firms evaluate bringing a more complex offering to the retail channel, they may change how they select to do so. In-house/affiliate capabilities (100%), acquisition of alternative shops (63%), and hiring/lifting out of professional teams (53%) are the most common methods of manufacturing alternatives. However, in the next three years, managers expect this to change—67% believe they will be increasing reliance on strategic or joint ventures and 67% believe they will be increasing reliance on existing in-house/affiliate capabilities. “While there may be a few cracks in the ecosystem, the industry stands at the precipice of tremendous growth as a confluence of factors—including inflation, the need for income, and simultaneous equity and fixed-income market drawdowns—align to create Goldilocks timing for distributing these exposures,” concludes Shapiro.

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