7 Trends Driving Alternative Investments in RIAs and MFOs

By: Gui Costin

If you’re in the Alternative investment industry and wonder if calling on the RIA channel is worth the effort, you’re not alone. 

Plenty of investment sales people have the same debate, and spend a lot of their time wondering whether or not they should invest the time needed to understand the complexity of the RIA channel.

We get it. The RIA market is extremely difficult to penetrate because of fragmentation and breadth across the country. For example, in our database, Marketplace, there are over 1,100 qualified RIAs across the country, which is a lot to cover, and can be an overwhelming exercise for anyone. 

However, at Dakota, we’ve been fundraising since 2006, and we’ve found success in calling on the RIA channel, and we believe you can too.

In fact, one of the biggest and most frequently asked questions that we hear: “I sell alternative investment strategies, is it worth my time selling to RIAS?” 

Our answer to this is always “yes.” 

In this article we’re going to unpack the trends driving the adoption of strategies within RIAS and the multi-family office community. By the end of the article, you’ll have a clear idea of just how lucrative the RIA channel can be for your team and your firm. 

1. Technology makes RIAs more accessible

Updates  and advancement of technology within the asset management industry have enabled access to alternative strategies making the whole investment and subscription experience easier — the whole RIA ecosystem is being built out where products can be scaled in a more fluid investor experience. Some of these technologies include:

  • iCapital and CAIS have built out platforms that offer lower minimum investments for clients
  • Docusign has made the subscription process easier because it allows paperwork to be signed without the long, clunky process many of us have gotten used to over the years. Now that this technology is in place, these things are a lot simpler, getting things signed and getting the investment.

2. The banking system is becoming more conservative

The reality is that the banking system is becoming conservative in underwriting standards, which has created the opportunity for capital to fill the void once occupied by traditional bank lending. Investment strategies like direct lending, structured finance , and other financing strategies are becoming mainstream 

Private capital is spawning these strategies so opportunities are shifting from the banking system into private lending strategies. Macro forces like extremely low yields are driving investor demand for strategies that can provide liquidity and cash flow once provided by core fixed income.

3.Alternatives offer an “alternative” to fixed income strategies and hedge equity risk

Due diligence analysts at RIA’s have the same concerns as institutional analysts.  How do I generate yield for my clients and how do I hedge equity market risk? These two concerns can be addressed through the many investment strategies and structures becoming more mainstream to the advisory community.

4. More product structures have made it easier for RIAs to access alternatives partnerships

Recently there have been more and more product structures that have made it easier for RIAs to access alternatives. Alternative investments used to be in limited partnership vehicles only, making it very difficult for investors to meet investment minimums.  

Many strategies have investment merit for providing yield and downside protection.  Now we are seeing an opportunity set of more liquid structures like interval funds, tender offer funds, ETF’s , mutual funds and other liquid vehicles where advisory firms can make meaningful allocations to client portfolios.

5. Low interest rates and a desire for high yield

Currently, there is a lot of demand for yield found within RIAs. For example, in a 60%/ 40%, the 40% is essentially earning you nothing. This means that RIAs have had to go out and find ways to earn 6-8% yield returns. This creates liquidity, and there’s demand because they need their clients to earn yield.

6. The competitive landscape within alternatives

In a competitive landscape, an RIAs line up of alternative strategies can be a point of differentiation. While they do not offer a huge dispersion of returns for equity performance, the dispersion of returns in the interest and ideas can be in the alternative bucket, i.e.: yield, hedging equity, private equity, co-investments.

We at Dakota have seen many advisory firms move quickly to enlist these strategies in portfolios to compete with other advisory firms to win client business

Additionally, the RIA channel is the most underserved market for alternatives. The research teams inside these firms are very sophisticated and control trillions of dollars! Alternative asset management firms are realizing this and we have seen this through growth from subscriptions for Marketplace.

7. The convergence between due diligence analysts who used to work elsewhere who have started their own RIAS

Over the last twenty years, there has been a very large convergence between the due diligence analysts who used to work at Consultants, Public Funds, Foundations, Endowments and other more institutional type firms, but now work at RIAs. These same analysts used to be heavily invested in alternatives, and are now bringing that alternative expertise to their RIA. A recent example is a large East Coast multi family office hired a CIO from a large P+C insurance company, a large southern bank hired a CIO from a leading foundation. 

These institutional CIO’s are porting over their alternative relationships to their new platforms

The musical chairs of analysts moving around and bringing their expertise in alts to their RIA is great news for alternative investment managers. With 15% to 25% turnover amongst 1,100 RIAs means if they know you and like you they will take you with them to their next firm.

Is the RIA channel right for your team?

The short answer here is yes.

Everything  mentioned above:  low interest rates, demand for yield, hedging equity risk, easier investor experience, lower minimums, institutional due diligence professionals moving to advisory platforms and technological advancements are creating a supernova of opportunity.

If  you’re marketing an alternative investment strategy, all the trends illustrate that marketing to the  RIA channel is mandatory.

At Dakota, it’s become very clear  there is massive growth from alternative asset management firms calling on advisory  firms that are increasing their allocations to alternative strategies.  This trend is growing due to more investor choice and utility in investment portfolios. 

Salespeople are having success and we believe this trend will continue

Still unsure if RIAs are the right fit for you? We’d love to set up a consultation to see how our team might work with yours to help grow your business.

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