Navigating the Democratization of Alternatives

Canoe Thought Starters is a blog series that explores timely topics for single-family offices, multi-family offices, registered investment advisors, and private banks. Designed as thought exercises to drive conversations within your firm, these discussions are inspired by our recent interactions with clients, prospects, and influencers in the industry. This month, we are discussing new opportunities brought on by the ongoing democratization of alternative investments and how wealth managers can overcome the associated operational burden with purpose-built technology solutions. Prompted by a real-life client challenge, we explore this on a broader scale in this thought starter.

Creating Operational Efficiencies in Servicing Diverse UHNW Client Objectives

When working with high-net-worth (HNW) and ultra-high-net-worth (UHNW) clients, their objectives and needs can differ considerably – meaning that the very nature of this type of investor can quickly lead to fragmentation. Each discussion may indicate differing interests in niche products, meaning that the investors are seeking out a wide variety of investments for their individual portfolios. Some are interested in exploring the impact of unique investment vehicles on their return, while others are keen to invest for a specific impact made through direct investment, and others still are seeking an increased sense of control. Thus, with competing priorities across UHNW individuals, it becomes nearly impossible for a multi-family office (MFO) or registered investment advisor (RIA) to operate in aggregate when advising their clients. 

Canoe client Trevor Hicks, Chief Technology Officer of Wetherby Asset Management, describes this exact issue: “From an operational perspective, we do our best to continually find ways to standardize our processes for managing client assets. However, on the client-facing side, we are a high-touch and highly customized financial service provider who will go the distance to provide a tailor-made client experience. These are two opposite ends of the efficiency spectrum and created a significant gray area between our front and back offices. To bridge this gap, we need solid back-office systems to drive and maintain consistent processes while being flexible enough to support an array of unique client preferences, investments, requests, and other needs.”

On their end, MFOs and RIAs have competing priorities. The need to offer their investors access to new investment opportunities exists in contrast to the business’s need to scale. In order to grow, the development of centralized, aggregated portfolio solutions is a highly valuable pursuit. In the interest of building a broadly diversified portfolio that serves the needs of their investors, MFOs and RIAs can utilize their strength in numbers to gain access to more exclusive opportunities and pass down the benefits to their clients. However, the benefits of this centralization tend to be limited as a result of the fragmented state of UHNW priorities. As a result, family offices and advisors looking to allocate more time to advising clients must find solutions to help standardize and manage resource-intensive downstream document and data processing workflows.

The Expanding Focus on Alternatives

Thanks to the democratization of alternative investments, these asset classes are no longer reserved for institutional investors. And, with new types popping up each year, alternative investments have been generating a lot of excitement and, subsequently, interest. Randolph Cohen, Professor at Harvard Business School, emphasizes the market’s enthusiasm for alternatives, noting that globalization and technological innovation present a constant stream of new opportunities to make money, thus causing a similarly constant level of excitement in the alternatives space as those new opportunities are nearly always going to fall in this area.

Attractive for a number of reasons, including the ever-increasing need for diversification, alternative asset classes have long been rather inaccessible to most wealth managers. Fortunately, we are witnessing a new era in which these asset classes are becoming available to more and more investors. As the opportunity set grows, signaling a change in traditional portfolio composition, more and more wealth managers are gaining interest in following the trend.

However, despite the increasing popularity and availability, you, like many wealth managers, may remain hesitant to allocate to alternatives as it is often difficult to put them to optimal use in the same way you are able to with more traditional asset classes. With a majority of advisors allocating at least a little bit to one or more alternatives in their client portfolios, now is a key time to understand how to better manage these less familiar asset classes so your business can scale. 

Navigating the “Old Ways” Known Challenges vs. the “New Ways” New Challenges

The palpable excitement for these newer investment types is tempered by the real challenges faced during adoption. In addition to the typical operational obstacles, alternative asset classes bring with them additional challenges. Not only are the asset classes complicated in their own right, but the lack of standardization in reporting across different counterparties means a further operational burden on your team performing the manual processes required to produce accurate reports. Alternative investors may work with many counterparties, each with its own document delivery mechanisms, leaving the investor following different delivery cadences for each document type, navigating through hundreds of portals for each document, and managing individual permissions for each location. 

Dating all the way back to the earliest “private-capital-type investments” – individual investments in Industrial Revolution projects, such as The Transcontinental Railroad in 1852 – alternatives have been largely restricted to the world’s wealthiest families. The exclusivity of these asset classes over time has meant that many wealth managers have limited knowledge of how to manage them. While the opportunity in alternatives is tremendous and the outlook is overwhelmingly positive, their actual adoption and implementation present you with a new set of requirements. 

Dennis Gallant, Associate Director of ISS Market Intelligence, emphasizes the importance of training and support. He highlights the need for assistance from specialists to train advisors on how to manage alternatives, how to understand which investment strategies to use, how to apply them in a portfolio, and where to access these asset classes in the first place. Even with that additional level of training, what remains difficult is the ability to scale the use of alternatives across all of your clients. 

Fortunately, these challenges are not insurmountable. Using other MFOs and RIAs as an example, like Canoe client Wetherby Asset Management, those who implement purpose-built technology prove the “new” operational burdens are possible to overcome and worth spending the time and effort to solve. 

Creating an Alternatives-Focused Technology Stack

With traditional investments, portfolio managers typically have the ability to undertake additional value-adding activities, like modeling their portfolios or systematically selecting new investments. Those same managers are now trying to figure out how they can allocate to alternatives in the same way they are used to with public equities. The answer to this is through the implementation of a tech stack focused on alternative investments.

The idea of an alternatives-specific platform is still relatively new. The nature of alternative asset classes means FOs and RIAs usually cannot be very systematic across their entities. Trevor Hicks, Chief Technology Officer at Wetherby noted, “I had heard that tracking alternative investments was time-consuming and problematic, so I sat with one of our associates to observe the work that she was doing. She was literally downloading PDFs and transcribing data to an Excel sheet so that it could be entered into our portfolio accounting platform. I thought there had to be a better way.” 

Before Wetherby built up their tech stack for alternatives, their team became very familiar with the operational burden brought on by the asset class’ lack of standardization and automation. “Tracking investments was an entirely manual process, requiring many hours of data translation and the very real potential for human error along the way. Today, much of this has been removed from our process thanks to technology like Canoe,” said Hicks.

When evaluating technology for implementation into their tech stack, he recalled, “Accuracy was our number one requirement. The technology needed to perform as good, or better than, a human interpreting and transcribing the information that we were pulling from statements in PDF format. Additionally, the cost of the system needed to be less than the cost of a full-time employee, otherwise, it wouldn’t make financial sense for us to make a change.” 

Canoe’s automated technology simplified processes more and more, and the underlying artificial intelligence contributed to increased accuracy and timeliness of their reports. Additionally, Hicks placed emphasis on the importance of quality system integrations: “Integrations are critical to the success of a technology stack in this space. There is no single solution that can be used for all aspects of our business, therefore, it’s important that our systems are capable of sharing common data with the least amount of interaction or manipulation from our people,” he said. 

Improvements across the tech stack, from more seamless integrations between systems that feed each other information to automating manual data entry processes, enable wealth managers to pursue more of the newly available opportunities to invest in alternatives. With purpose-built solutions like Canoe’s, firms like Wetherby are able to better service the nuance and complexity of each of their clients. 

And, even further, as a result of implementing and deploying their updated tech stack, Hicks notes, “We are realizing additional benefits of the Canoe platform in the things that it can do that we didn’t know we needed; for example, a document repository for all of our alternative investments documents or the ability to help us streamline our 1099 and K-1 processes. Our people have more time to focus on work that is more complex and, often, more interesting.” 

For MFOs and RIAs trying to manage competing client priorities while delivering stronger returns, it is not only now possible but quickly becoming essential to invest in alternative asset classes. By implementing an alternatives-specific technology stack from the onset, how much more time could your team free up to focus on strategic priorities?