Show V/O:
This is Alternative Allocations by Franklin Templeton, a monthly podcast where we share practical, relatable advice and discuss new investment ideas with leaders in the field. Please subscribe on Apple, Spotify, or wherever you get your podcast to make sure you don't miss an episode. Here is your host, Tony Davidow.
Tony:
Welcome to the latest episode of the Alternative Allocations podcast series. I'm thrilled to be joined today by my good friend, Bill Duffy. Bill, thanks for joining us.
Bill:
Absolutely. Thank you for inviting me, Tony.
Tony:
And we've been talking about doing this for a while. Share a little bit about your background. What are you focused on today?
Bill:
Absolutely. I've been focused on alternative investments for about the last 15 to 20 years. Tony and I go way back, over a decade ago, where we were first talking about how do we develop educational content to enable advisors to even want to learn about alternative investments. Today I oversee the alternative investment platform that RIAs and broker dealers use to access alts through Fidelity.
We're about 95 billion in assets today covering non-traded REITs, BDCs, tender offer funds, interval funds, up through to your typical LP products.
Tony:
And you also have another role, and I think that's kind of an interesting role as well. You're involved with IPA, another industry organization kind of helping us in this journey to educate advisors about everything that's going on in this ever-evolving space. Maybe talk a little bit about IPA and the mission.
Bill:
The IPA is the leading trade group that's focused on enabling the private wealth community to access alternative investments. We focus a lot of our efforts on education as well as advocacy. Many of our member firms represent asset managers such as a Franklin Templeton, or distribution partners such as Fidelity, as well as other stakeholders throughout the ecosystem.
Tony:
And you're the chair. So this has been a passion of yours. I know that you had me speak at the conference last year, and it was really great to have that whole ecosystem together. I think one of the things we've been talking about a lot in this podcast series is the fact that this is relatively new to the Wealth Channel, but it is definitely getting a lot of attention from all stakeholders.
I'm gonna ask you a question Bill, that I know we've been talking about for a long time, which is, why is it different this time? You and I were talking about this 15 years ago. We thought that that was the inflection point. Why is this a different point in time and why do we think that now adoption will start to accelerate?
Bill:
I think there's really three considerations that my team believes is driving the growth we've been seeing over the last few years. Number one, long-term capital market assumptions. Increasingly wealth managers recognize that by allocating a portion of an investor's portfolio to private markets may help them to achieve their long-term financial goals better than just having your portfolio allocated only to traditional investments.
The second major aspect that's really opening this up is the evolution of product structures. Tony, when you and I started this, it was only LP product structures, draw down vehicles, high minimums, et cetera, and there were significant barriers that really inhibited a retail investor from gaining access to private market exposures.
As you well know, we've really seen the proliferation of perpetually offered private market strategies that were intentionally designed for that retail investor, if you will. They offer, you know, evergreen vehicles, they typically have 1099 tax reporting instead of K-1’s. The minimums, rather than a million dollars for your typical LP, they're really accessible, sometimes as low as $2,500 up to $50,000. And then from an investment perspective, particularly with those strategies focused on private equity, investors can oftentimes get immediate exposure to a seasoned portfolio of investments rather than seeing the J-curve that they normally would with your typical drawdown type product.
Tony:
We would agree. We think those are the same sort of catalyst. The market environment definitely is demanding a more robust and reliable toolbox. We love the product proliferation. Our view is it's not an either or. We think evergreen or drawdown actually work together well. And on this podcast, we've certainly talked about the ability to incorporate both of them, but I think at the end of the day, none of this works unless you have access to world-class managers. And that's what's exciting to me is all the new players coming to this market. So ultimately the people winning are the advisor community and the underlying investors.
Bill:
That's spot on. That is the third major aspect we're seeing that's driving the growth of alternative investments for private wealth is the caliber of the managers that are now really focused on this channel. You can look at that really a couple of different ways. You have the traditional investment managers that really have been focused on this channel for quite some time and have not offered alternative investments to their clients.
And at the other end of the spectrum, you have some of the largest alts only managers that historically focused on true institutional investments and retirement accounts, et cetera. Those asset managers are really now also focused on the private wealth channel. So it's a really exciting time.
Tony:
It is. And again, the beneficiary being the advisor and the investor because they have access to these managers who have navigated challenging environments in the past, and I think that's the environment we live in today.
This isn't a space where you want a newbie who doesn't really have the experience. So experience and expertise definitely matters here. You and I have been talking about this for quite some time, and we've been stuck on this advisor allocation, which is roughly 5- 6%. I know that Fidelity's done research on it, and I believe also IPA has as well.
What does the research show you about advisor adoption and where are we in that inflection point?
Bill:
I think you need to take all of these surveys with a grain of salt because you're somewhat dependent on when you ask a question of an advisor, do you allocate to alts or not? You don't know exactly what type of alternative investment they may be thinking about.
Is it a true private equity fund? Could it be a mutual fund or ETF? Could it be GLD? But that being said, from all of the research that we've reviewed, advisor adoption of alts is still very fragmented. According to a Cerulli 2024 report, about 25% of advisors indicate that they allocate over 10% of their client portfolios to alternative investments.
At the other end of this spectrum, you have about 40% of advisors who've indicated they don't allocate anything to alts, and then the 35% is right in the middle there between one and 10%. To my earlier point around some of these survey results are somewhat dependent on how the advisor interprets what an “alt” is.
A Fidelity survey in 2023 asking the same question, about 80% of advisors indicated they had some exposure to alternative investments. But to your point, industry-wide, we really think it's closer to 5% typical allocation.
Tony:
We've had the discussion with Cerulli and there clearly is a little bit of a bias because one, advisors will use a broader description than maybe you and I would.
And the other thing, if they're self-reporting, sometimes I think it's aspirational. We should be allocating 10%. But is it in fact 10% across all clients? And I think that's one of the areas where the evergreen structure has really helped because now an advisor can allocate across their whole practice where the drawdown structure, which was a predominant vehicle a decade ago, was only available to qualified purchasers, 5 million or more in investible assets. So that's one of the key inflection points for sure.
Let's talk a little bit about advisor education. So one of the impediments is advisors don't wanna have that awkward discussion unless they're a hundred percent comfortable with it. Talk to me a little bit about the work that you're doing. The work that IPA is doing. Certainly our focus here is on helping advisors understand the merits of the underlying strategies, understanding structural differences. The evergreens versus the drawdown, what are the structural trade-offs. What are you doing and what do we think we need to do as an industry to kind of move that dial a little bit further?
Bill:
At Fidelity, we've spent a lot of time the last few years really thinking through what type of educational content can help advisors understand what are alts, why should they be allocating to alts, and really getting to the how do you allocate to alts and what types of strategies.
And from that perspective, we have a number of different white papers. But what we were really excited about last year was introducing target asset mixes into this educational content to help an advisor understand if you take your traditional target asset mixes and want to allocate to private markets, what might that look like in the context of a total portfolio? And then how do you actually source that?
One of the biggest questions we get once an advisor's decided they want to allocate, it becomes a question of where do they pull that money from to make that allocation? So we've been spending really a lot of time just educating advisors, how do they think through the implementation aspect.
Tony:
I was gonna say that's one of the biggest challenges that we hear over and over again and a lot of work that we've been focused on is building better portfolio series, which is really designed to show the impact of adding diverse basket of private market to a total portfolio. And then the other part of that, obviously, is then to help them kind of think through how they can then take that back to their practice and start to translate.
So I have clients that look like this. What's the right percentage allocation? Where do I source it from? And then ultimately, what does it do to my client portfolios over the long run? So I think that's clearly one of the impediments. I did wanna maybe take a step back and reflect on a lot of the survey results that you and I have looked at.
There are barriers, right? And we can't be blind to that. You know, one of the impediments that I always hear about is illiquidity. You know, this fear of losing control of the assets, even though we've made progress over the last couple years, I still think operationally it's not as smooth as opening a mutual fund account where you drop a ticket.
What are you guys hearing about and what are you doing about that?
Bill:
Definitely number one, the perceived need for liquidity is the most common cited barrier to beginning to adopt alternative investments. And so in some of that content that I was referring to earlier, we're also helping advisors understand how do you assess the true liquidity need of that investor, and then help the end investor understand that they may actually benefit from having securities in their portfolio that have some illiquidity to them.
To your comment around the operational challenges, and we've been focused on making allocations to alternative investments, a more seamless experience for over a decade. We work with many of the leading alternative investment platforms that make it just that much easier to complete subscription documents, to identify and research top performing asset managers. But now we're really starting to shift our focus to what is next. After you make that initial allocation, how does your technology stack incorporate alternative investments seamlessly into that advisor's experience from a performance reporting perspective, a trading, a modeling perspective, et cetera. We think there is still a lot more room to go in terms of having a seamless experience for that advisor.
Tony:
I think that's a perfect segue. I mean, the more that we go from that five to 6% allocation to where directionally maybe they're 15 to 20% across the industry, the more that we can make it seamless from start to finish portfolio construction, modeling tools.
And it was nice to hear you talking about that. I know a lot of the industry players are starting to help advisors understand the impact of adding these tools because advisors don't always have access to the data. They can't necessarily do it on their own. Just imagine where we're going to be five years down the road. How do we get from 5% today to that 15 to 20% down the road? What do you think are the steps that we as an industry need to undertake?
Bill:
In the alternative investment space, we as an industry need to understand that in order to increase adoption of alternative investments, there's a critical need for additional data.
Today in the traditional space, an advisor might go to a Morningstar to get a return series. It's really challenging for most wealth managers to access a database of historical information on alternative investment performance, as well as to compare individual funds. So from that perspective, we are starting to see some of the portfolio construction tools and some of the alternative investment FinTech platforms really try to build modeling solutions to help enable advisors to access these markets.
Tony:
So Bill, you sit in a very interesting seat. I'm curious, what is it that you need from asset managers, third party providers who are part of this ecosystem? What is it that you think that you need to help your end user start to embrace these tools in a more efficient fashion?
Bill:
Education continues to be a significant opportunity, particularly content that can be used with the end investor. There is a lot of great content out there today, but it's typically geared for the wealth manager, the investment advisor. And to your comment earlier, Tony, many wealth managers really need material that they can use to then educate that end investor. And if they don't have that, they may not be willing to even have that conversation with their client.
Tony:
I think that's one of the most important things that I hear over and over again is once we get the advisor comfortable and advisors generally get the intellectual argument of why to add private markets, I mean, the data is so compelling. But the challenge is often that next level discussion and the more that we can produce that they can use directly with clients. I know it's something that we're very mindful of here. The vast majority of what we produce, including this podcast series, is really designed to help that end user understand the language that we use, which sometimes can be confusing. Understand where the industry is, where the industry is going. The risk return tradeoffs is not a one-way type solution, right? We have to understand that, but I do feel like there's more of a coalescing around the industry, recognize this is a challenge we need to go on together. And I've said over and over again, it's not one firm competing against the other, which I think has been the battle in the traditional space for many, many years. It's really, we as an industry understanding that we all win if the pie goes from 5% to 10% to 15%, and ultimately, I think the big winners are the wealth advisor and the individual investor because they get access to these great tools that they haven't had historically. And at the end of the day, that's really good for everyone who's part of this.
Bill:
I would agree with that. It's a really exciting time in the space, and if we really think about one of the large impediments being the perceived need for liquidity, we're starting to see some indicators where there's some creative solutions happening to enable private market investments to be included in your more traditional mutual fund and ETF type wrappers. Which is interesting to see if that will actually drive adoption of alternative investments forward.
Tony:
So since you mentioned it, I'd love to maybe talk about products a little bit. I wonder with trying to fit an illiquid solution into an ETF structure, what we're really trying to solve for. Haven't we gone far enough with interval, tender offer funds, private BDCs, and offering illiquid investments in a wrapper that really generally works for most advisors. Do we need them in an ETF structure?
Bill:
I don't know if we necessarily need them, to be honest. One of the reasons we have not seen private markets typically included in mutual fund or ETF portfolios is that the nature of the underlying asset is inherently illiquid.
And if you need to provide that liquidity on a daily basis, or more frequent in the case of an ETF, how do you actually do so? So it'll be interesting to see how these products actually evolve over time to address that challenge. All of that said, the mutual fund and ETF wrappers are certainly more accessible. If the industry is thinking about how do you actually include private markets in defined contribution plans, perhaps that is one potential path forward. While others are including private market strategies in target date funds and professionally managed diversified portfolios of securities. So that'll be interesting to see how it evolves over the next few years from the individual product wrapper perspective.
Tony:
And that's a topic we've covered on the podcast, which to me is so exciting to think about having private markets in DC plans. I think that's kind of a home run for the industry. From your seat because you're seeing all of the asset managers coming to you and probably talking a lot about things that maybe they're incubating, I'm curious about two product thoughts. One is public private in one structure, and I know there's some work that's been done there. And then two, model portfolios, which again, for some advisors, maybe it's easier for them to get something that's prepackaged for them. What are your thoughts on those two areas and are you starting to see momentum there?
Bill:
So for the first area of public private structures, we're at very early days. We've only heard a few announcements like that. I do expect that other asset managers are thinking through how can they follow that same path forward, and does that look like collaboration between a traditional and a private market specialist?
From a model's perspective, over the last number of years, we've really seen wealth managers understand they may add more value to investors if they start using model portfolios and focus on estate planning, financial planning, other areas. I do think potential for alternative investments to be included in model portfolios presents a significant opportunity.
At the same time, there are a lot of complexities that have inhibited alts to be included in models. You think about rebalancing as a simple example, whether you want to rebalance on a quarterly or an annual basis. Even with the intermittent liquidity vehicles that exist today, a lot of them have different tender frequencies. What do you do with that cash in between if you're looking to make a new allocation or redeem from where you might be overweighted? There's a lot of complexities that will need to be solved there.
Tony:
I think we're at least talking about it. We're identifying what those pain points are. I think those are all things that can be worked through similar to the discussion in the DC plans.
We understand they're not mutual funds and therefore there's some liquidity sort of management provisions, but I think it's exciting as an industry. Bill, thank you for sharing your insights. I think we've covered a lot of ground. We'll have to have you back as we think about where this industry is evolving.
This has been Bill Duffy from Fidelity. Thank you so much for sharing your insights, Bill. For those listeners, we encourage you, if you like our podcast, please rate and provide a review and let us know if there are other topics you'd like for us to consider. Thanks so much, Bill.
Bill:
Absolutely. Thanks for having me today, Tony.
Show V/O:
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