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 Alternative Allocations podcast series. I'm thrilled to be joined today by Loren Fox. Welcome Loren.
Loren:
Thank you, Tony. Great to be here.
Tony:
So Loren, you and I have known each other for a long time. Maybe if you can just paint a little bit of a picture of how you've seen the industry over the years in your various sort of roles as you've been researching how this industry has evolved.
Loren:
What's really exciting is to see this new phase of growth in the alternative part of the industry. You know, as you've covered in previous episodes and in your book, alternatives started really as the province of institutions and very high net worth investors. And over the last few years that has been changing, and a big part of the growth now is expected, and certainly we expect it, to come from the wealth management channels, particularly because there are so many products that have been launched and that are continuing to be launched that take the private markets and make them much more accessible in product wrappers that are much easier to use by financial advisors.
Tony:
And thank you. We'll certainly delve into all of that. I wanted to maybe, take a little bit of a step back. I have known you for a long time. But from my audience that may not, if you could just share a little bit of your background on that and your role specifically at FUSE today. And don't be bashful because I did my research. I know you wrote a book on Enron going way back in time.
Loren:
Well, on a personal level, I started as a financial journalist and as part of that I wrote a book on Enron that came out in 2002 shortly after that company collapsed. And I've been writing about the asset management space, the energy industry, the high-tech industry, things like that. But I shifted into really focusing as a research analyst and consultant on asset and wealth management about 16 years ago. And the one thing that I will say about the arc of the industry is that over the last five to 10 years, the pace of change has tremendously accelerated. And it's not just alternatives, it's the growth of ETFs, actively managed ETFs, model portfolios, direct indexing, changes in the advisor world as well. So really, as more and more financial advisors have morphed from being investment people to being sort of holistic wealth people in investment management.
And actually we, we just did a survey of advisors a few months ago. We found that the average financial advisor spends 15% of their time on investment management, and the rest of their time is being spent on financial claiming, business building, all the other things that are required, not just of their job, but also what clients now expect.
Tony:
And yet we're trying to introduce new complex sort of products. No surprise, it's been a little bit of an uphill sort of battle. I wanted to delve into a little bit of the work that you're doing with FUSE. So in your role at FUSE, I know you're doing a lot of research on the advisor community, which you just mentioned, but you also are seeing the world from, I think, a different lens than a lot of the guests that we have on the podcast series, and that is that you're actually studying and working with asset managers as they think about manufacturing products that they bring into the channel. You're studying advisor trends, not just the time consumption, but what sort of strategies they're using and all of that.
Maybe if you could, again, focus a little bit more on alternatives here, but what are you seeing in your studies about advisor adoption of alternatives? What are some of the challenges? What are some of the hurdles? Where are you seeing the biggest opportunities?
Loren:
It's not a surprise that right now adoption is still pretty low, and those advisors that are using alternatives are using them in small portions. We're really talking about 2-5% allocations, maybe a little, a few getting into the 5-10% range, but that's still more rare really, except for the big, the power users who are doing this, and those tend to be the bigger advisors, those with books of business over a billion dollars. They tend to be either private banks or wirehouses, things like that.
So your average advisor is really still dabbling, dipping their toes in the water, as it were, of alternatives. There's three main things they're seeking from alternatives. They're seeking diversification or some sort of less correlated sets of returns and risks, and that's followed by risk mitigation or downside protection, and then usually in third places, upside growth in principle. Those are really the three things that are really attracting advisors to alternatives. But on the other side. They have some real obstacles, so even advisors who are interested, often they don't have access at the firms that they're working. Now that is starting to change. We're seeing a lot more firms, wirehouses, large broker dealers, even Edward Jones, which is like the main street brokerage of America saying, look, we're going to actively and intentionally spread the use of alternatives among our advisors. Many are doing it with their own platforms that they're building. Many are partnering with some of the kind of interesting FinTech platforms that are out there that some your listeners may have heard of, like CAIS and iCapital and those firms. And they do a great job of making it a lot easier for advisors to find alternative investments that are suitable, onboard their clients, handle all the reporting and, and all of the paperwork, and kind of streamline the process. Even if firms that aren't, and advisors that aren't using those platforms, I think those platforms have set the ball. They're defining what the user experience is gonna be.
Tony:
We work with firms across the industry and we're finding the Morgan Stanleys may be a little further along because they've been using and building up platforms for years, you mentioned Ed Jones, but it really has become a universal thing that firms have recognized high net worth investors expect to have access to alternatives, and if advisors aren't investing in themselves, they're likely to be left behind.
You painted a picture, which I find very compelling, which is the way that we typically look at, which is private markets in particular are really geared to solving for all the challenges that advisors have. They're geared to providing incremental return. You got that long illiquidity premium from private equity designed to provide alternative sources of income, which we get from private credit and private real estate. It provides that downside protection because it provides no negative correlation like real estate, real estate equity debt. Both have historically delivered negative correlation. So the story is an easy one, but the challenge, which I think you started with is, is a big one, which is spending the time to really understand what's going on if an advisor’s so consumed with everything that's going on, just serving their clients today.
Where and how do they find the time to learn more about it, to use them intelligently? And I know you have some findings on that as well.
Loren:
The one thing that we have found in surveying advisors is they all want education. And at this point, advisors have sort of the alternatives 101 content down pat.
Now they're looking for the next class, if you will. They're looking for more information about the details of diving further into the asset classes, the vehicle structures, you know, what is the difference between a non-traded BDC and an interval fund, and why would I go with one over another? And so what we're seeing is a lot of the firms that are providing these alternative investments from the Blackstones and Cliffwaters of the world to the Blackrocks and the Franklins are investing in two things. One is a tremendous amount of, I would say, digital content, whether it's microsites, videos, things like that, to help guide investors and advisors through this educational process.
The other thing is, all these firms are staffing up in what we call alternative specialists, and these are folks who are not salespeople themselves, but they can complement the job of the salesperson by going out with them and sitting down one-on-one to talk through the details of different alternatives, different asset classes, different structures with the financial advisors.
And what we find is that the advisors respond very, very strongly to these, having these people, these experts who either meet with them and then are available on an ongoing basis. So, I think that the industry is, is trying very hard. They're coming at it from a very smart way. But as you already noted, it's a tall hill to climb.
It's a big ask to say to a financial advisor, this is a very small piece of your overall business and you have some real reputational risk here, but we want you to make this leap. And also, it requires you to do some work, which is all another ask. If it were something where you could just use an app and have someone like bring it to you like DoorDash, then maybe, you know, the uptake would be much bigger.
But it really is an old school kind of sit down and pour through the prospectus kind of part of the industry.
Tony:
And I think we're all on this journey together. I appreciate everything you. It's in fact, we created the podcast series. It's in fact why Franklin Templeton hired me. We understood that this is a journey.
We need to identify where advisors are, help them on their journey, help them get a little farther down the road. The podcasts, the blogs, the white papers are helpful. But to your last point, I do find the differences. Advisors wanna have a one-on-one conversation with you. So I'm on the road quite a bit because I wanna sit down with an advisor so they can ask the question that maybe they're not gonna ask in a big group, or maybe they're uncomfortable asking somebody at their headquarters.
But I think ultimately we're all trying to get to the same outcome, which is how do we help clients achieve their long-term goals, dreams, and aspirations. We have a great toolbox, but it's not easy. I wanted to go back on something that you and I were talking about a little bit when we were getting ready for this call, and that is, I know you have done some research on the point that you're just talking about, which is research and white papers and how to engage advisors. Everyone's trying to do it. Are you getting a sense of, not mentioning a firm, but are you getting a sense of the type of information that's the most helpful for advisors? Is it a podcast? Is it a white paper? Is it in person? Is it all of the above?
Loren:
It's a mix. It's certainly different people have different learning styles. I would reiterate that usually the number one tool is the expert, and that's why firms out there, they're all hiring more “Anthony Davidows”. Beyond that, I think having the more interactive kind of content is what we have found to be very compelling.
So an online course, videos, things like that. I mean, white papers are great, but again, the industry is kind of moving away from sitting down and spending 20 minutes reading through a white paper. It's happening everywhere.
Tony:
And I'm very sensitive to the advisor, all that they have on their plate. So we're trying to meet them where they're on their journey. We do have the online training. We can deliver a webinar, but everyone consumes information differently.
If we could, I wanted to switch gears a little bit and talk about we’ve kind of identified where we are, and I think you and I both believe that this is a train that has left the station and we're likely going to get there over an extended period of time. I'm curious about some of the trends that you're seeing from your seat. And there are two trends I'll throw out, maybe just get you to respond to, but any of the things that come to mind.
One is I think we're starting to see a lot more interest in model portfolios, which gets to the concern that you raised about advisors and the time commitment. Models make it easier if you're spending so much time. You can make a single decision and get the allocation done for you.
We're starting to see interest in products that incorporate both, not active, passive, both public and project markets kind of side by side, which again, makes it a little bit easier to, I make a decision or I want to have fixed income, my portfolio, and somebody's making a decision, “How much of that is public versus private?”
And then the last trend, which is more of a macro trend, but it's something we're certainly excited about and we've been covering in some of the past podcasts, which is this interest in the retirement space, getting private markets in particular in the retirement space.
So those are the three big macro trends that I'm kind of looking at. I'm curious what you're seeing and whether you have any thoughts on any of those three or other things that maybe we haven't talked about?
Loren:
Well, let me put it in a bigger context, which is we estimate that the wealth management channel now accounts for something like $1.4 trillion in alternatives assets.
We expect that to grow to $3 trillion by 2029, so a compound growth rate of 17% a year, which is a pretty high growth rate. That's almost as fast as ETFs will be growing in the next few years. And so, a number of things are driving that. All those things that you mentioned are kind of potential accelerants to that growth.
So even without growth in models, growth in public, private, blended products, and certainly without growth in the retirement space, we think that alternatives in general are growing. And then the share of that market that is coming from the wealth management channels is growing within that. And so you're seeing that double effect. But you're right to identify some of those big macro trends.
So I think the key as, as you alluded to, is to try to get alternatives into advisors’ practices where they are, how they're doing business. And with the tremendous growth, the amount of portfolios, that seems like an obvious place to try to put more alternative products or alternatives exposure. We do think that that makes a lot of sense and we're seeing some interesting experiments out there, and certainly some of those FinTech platforms and some other providers are actually busy putting together alternatives models that people can use that will give them diversified alternatives exposure. I think that those products or those solutions or those models that mix public assets and private assets are also potentially very compelling. And again, we're just starting to see some firms, you know, like the BlackRocks of the world start to dip their toes into that area as well. It'll be interesting to see how much potential that actually has going forward. That might be a bit of a harder sell because you have very different timeframes in the feeds being combined into one product. But if you find the right vehicle, find the right wrapper, that can help carry a lot of that load. For example, I'll be honest with you, I don't think that an ETF or another product that typically is supposed to have daily liquidity is a great vehicle to put a lot of private assets into.
Tony:
I agree a hundred percent. I ask the basic question, what is it that we're solving for? To me, the fact that we've got these evergreen structures that are generally available to accredited investor below, that's great. We have better liquidity, we have lower minimums, we've got everything that we really need. I worry about taking something that's special, which is illiquid in nature and trying to force it into a liquid structure like an ETF. So I get that question a lot and I'm not sure people like my answer, but I don't think we should be solving for that. I think we've gone as far as we should go. Could you force it in there? Potentially. Would you have the same experience? Probably not.
Loren:
It's a tough one, and you know why put in that work when we're seeing such rabid demand for the evergreen structures? I mean, just the demand for private credit has been driving tremendous growth in interval and tender offer funds, and more and more firms are entering that space, right?
You've already got big players like Cliffwater and Carlyle and other traditional alternatives managers, but really over the last few years you've seen what I would call the traditional mutual fund managers piling in to the evergreen space as well. You've got firms from Raymond James and Wellington to Franklin and Fidelity and others.
These are all firms that know how to market and sell to financial advisors. That's only gonna be good in the long run for the evergreen space because they're going to help make it much more of a mass market.
Tony:
And I would argue it only works if you deliver that exceptional experience that you expect out of private markets. If you delivered a watered down version, something that doesn't work well, it hurts all of us. All industry players get hurt by that, and I think there's a sensitivity across the industry that we're all in this together. You and I have been doing this for a long time, and it's rare that you actually find all of the key stakeholders kind of aligned that we all want to see this be successful. And I often argue that we're not competing against one another as much as we're competing with each other to collaborate and get everyone to understand this because it provides better outcomes to advisors and investors, and ultimately, we all win if done appropriately.
Unfortunately, we all get painted with the same brush if we have blowups and they don't work out well. So I'm sensing a little bit more of a kindred spirit of trying to have those good outcomes and avoid these quick fixes along the way. I think there's no shortcut for, it's going to take time, it's going to take effort, it's going to take collaboration across the industry.
I wanted maybe turn the clock back or think about the future here just a little bit and think about where are you seeing the opportunities? Other than the three that I kind of mentioned. Are there other areas that you all are focused on as you're looking down the road, whether it's manufacturing, coming from asset managers or demand that has yet to be met in the marketplace?
Loren:
From a strategy point of view, we've already seen the wealth management channels embrace private credit in a big way, private equity, real estate in a selective way. I think that what'll be interesting to see is if some of the other private markets asset classes really get put into wealth management type vehicles like evergreens or other firms. I could imagine infrastructure is kind of a hidden gem perhaps, or an underappreciated strategy.
I think with the challenges of private equity exits that we're continuing to face. I think secondaries could be something that more financial advisors could be interested in. But again, there's not a lot of interval funds being launched with secondary strategies. So there’s more room for other kind of interesting products and interesting asset classes in terms of just exposure.
From the asset manager side, I think we're gonna see much more partnership going forward. The traditional asset managers, quite frankly, see this as a space where there's not huge, intimidating incumbents to compete with, like in other parts of the asset management world. They see it as kind of more of a green field. They really like the higher margins that you can earn from these products, especially as margins on mutual funds and ETFs continue to get squeezed and SMAs as well.
And so we've already seen a tremendous amount of effort being put into grab toeholds in the space. Of the 75 biggest mutual fund ETF managers, 70% of them now have some sort of alternatives capabilities. Some of them have acquired alternatives, you know, specialists, some of them have teamed up with other firms. Some have the capabilities in-house. So there's multiple ways to get at this. But I think we're reaching the point now where there are gonna be fewer acquisitions that make sense in terms of the economics, and we're gonna be seeing more partnerships and sub advising deals being put together in order to bridge that gap between the traditional asset managers and the alternatives space.
Tony:
You know, not to kind of cross the line here, but I think it's been part of Franklin Templeton's strategic vision to make very smart acquisitions and I heard Jenny Johnson speak about this time and time again. It's gotta be the right manager, it's gotta be the right cultural fit, but it's also gotta be at the right price. And I think to your point, I think as everyone's kind of woken up to, gee, I need to be in that space. You can build, buy, or align. If you build, you better make sure you've got a world-class manager and they can continue to deliver those results.
We're very excited about, you know, the lineup that we have and where we’re going as an industry. I suspect others will try to follow suit. But like everything else, if you're just chasing the parade and you're paying exorbitant prices to get it, it may not work out the way that you want. You have a very unique seat. You're looking at where we are today and you're looking down the road. Are there any new research projects that you're working on that maybe our audience would be interested in?
Loren:
One of the things that we're doing at FUSE, and this may be something that's more of a towards the end of 2025, and certainly more so in 2026, is we're gonna be doing a lot more research with financial advisors and trying to figure out more about what matters to them, what drives their business, and helping them benchmark, you know, what does a successful financial advisor practice look like? So I'm very excited about that.
And then on the asset manager side, we're doing a lot more sort of consulting projects help folks figure out how they need to be positioned for the next few years, because as already mentioned, the pace of change is faster. Everyone's running faster. Alternatives, the growth of alternatives in the wealth channel is one important piece of it, but it's part of a larger shift in the industry. It's affecting both the asset managers and the financial advisors.
Really everyone has to get smarter and stronger and more flexible. I know it sounds like I'm preaching yoga classes, but actually it's about setting up your organizations for the next five to 10 years.
Tony:
Well, it's a fascinating time in our industry. It's been great spending time with you today, Loren. Thank you for your insights. We'll have to come back and revisit how the industry evolves. It certainly is moving quick, and I suspect the pace of change will only accelerate. Loren, thank you for joining us on the Alternative Allocations podcast series.
To all the listeners out there, if you haven't already done so, please sign up for the podcast. Let us know what you like, rate us and let us know if there are other areas for you to consider as you think about allocating capital to this really exciting area. Loren, thank you for being my guest here today.
Loren:
My pleasure.
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