Key Findings from the Money Management Institute’s 2015 Edition of Distribution of Alternative Investments through Wirehouses
Washington, DC, May 21, 2015 – The Money Management Institute (MMI), the national association representing the $4 trillion managed investment solutions and wealth management industry, has released its 2015 edition of Distribution of Alternative Investments through Wirehouses. With growth of 19% in 2014, alternative investments – both liquid and traditional – continue to be one of the fastest growing asset classes, and the report analyzes the factors driving wirehouse advisors and their clients to embrace them. It is the only industry study that provides a comprehensive overview of this market segment, one that includes analysis of both traditional and liquid alternative investments. Among its key findings:
Strong Prospects Seen for Continued Growth in Alternative Investments
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The increase in wirehouse-associated traditional and liquid alternatives through retail channels from $172 billion at the close of 2013 to $205 billion during 2014 came as somewhat of a surprise to some in the industry because it occurred in the sixth consecutive year of positive returns for equities and amid unexpectedly resilient bond markets. Conventional theory is that strong returns for stocks will cause investors to lose sight of the diversification and downside protection benefits of alternative investments, resulting in slower growth. This surprisingly robust growth – albeit over a relatively small base – is due in large part to advisory solutions sponsor firms and investment managers using alternative investments to achieve specific portfolio outcomes, particularly those that align with goals-based wealth management. The prospects for continued growth appear strong because, at a time when penetration across client portfolios still hovers around 5%, sponsors continue to recommend allocations in the 10% to 20% range.
Continued Growth in Liquid Alternatives
Wirehouse assets in liquid alternative mutual funds and ETFs stood at $102 billion at the close of 2014, an increase of 15% from $88 billion at year-end 2013. This was more than twice the industry growth of 7.3%, an indication of the leading role wirehouses have played in fostering the adoption of alternative investments.
Total Wirehouse Distribution of Alternative Investments through Retail
Channels, 2013 – 2014 Assets ($ billions)
Sources: Money Management Institute, Dover Financial Research
More Granular Terminology Leads to Better Understanding, Utilization
In the past year, advisory solutions sponsor firms have begun to attack the fuzzy product descriptions and classification schemes that made understanding and properly allocating alternatives difficult, and more practical and concrete classifications are now beginning to emerge. One firm breaks alternatives into “diversifiers,” “equity complements” and “fixed-income complements.” Another ranks products from “aggressive” to “conservative” based on the risk/return profile of the fund. These approaches take into account the impact of a strategy on an investor’s net exposure and overall portfolio, a process that goes far beyond traditional “bucket” allocations. Overall, the steps being taken to identify the roles alternatives play within portfolios to achieve specific outcomes dovetail neatly with the trend toward goals-based financial solutions.
Cannibalization or Convergence?
Liquid alternatives have been steadily gaining share from traditional alternatives, increasing from 38% of wirehouse alternative assets in 2011 to 51% in 2013, but this trend stalled in 2014 as the share of liquid alternatives dipped to 50%. While the continuing growth of liquid alternatives has been sometimes characterized as the cannibalization of traditional alternatives, that view now appears, as the statistics suggest, to be an oversimplification because advisors are not reducing allocations to traditional alternatives in order to buy liquid products. Sponsor firm interviews indicate that the migration to alternative strategies in both liquid and traditional structures is at the expense of traditional mutual funds. This is predictive of a changing market in which the competition for advisors’ attention is heating up, and it may be more appropriate to frame the trends in the alternatives space in terms of convergence rather than cannibalization. Liquid alternatives are moving up market to high-net-worth clients, and traditional alternatives are moving down market as large alternative managers look beyond their core institutional base and attempt to expand their footprint in the retail channel by attracting advisors with new hybrid products that appeal to high-net-worth investors. Similarly, mutual fund managers, who continue to face serious competitive challenges, are seeking to develop new strategies to expand product offerings.
Managed Solutions and Liquid Alternatives: An Excellent Fit – Managed solutions programs, used by advisors to create holistic, outcome-oriented financial solutions for clients, are ideally suited for alternative investments. Thus, it comes as no surprise that, while liquid alternative products account for 16% of wirehouse mutual fund and ETF flows, 70% of those liquid product flows are linked to fee-based programs. While they can be introduced without totally taking away an advisor’s freedom to add value through portfolio construction and investment selection, they enable centralized control of investment risk and compliance oversight and capitalize on economies of scale in research, trading and operations. All of these characteristics provide a good fit for the use of alternative investments in advisory programs.
About the Money Management Institute (MMI): Since 1997 MMI has been the leading voice for the global financial services organizations that provide advice and professionally-managed solutions to individual and institutional investors. Through industry advocacy, educational initiatives, regulatory affairs, data reporting and professional networking, MMI supports and advances the growth of advisory solutions. MMI members’ advice-driven investment solutions serve an evolving worldwide financial landscape and their organizations are committed to the highest standards of fiduciary responsibility and ethical conduct and to creating the most successful outcomes for investors at every level of assets. For more information, visit www.MMInst.org.
About Dover Financial Research (Dover): Dover is a boutique Boston-based research and consulting firm specializing in the financial services industry. The analysis, independent research and market intelligence that form the foundation of MMI Central are provided by Dover on behalf of MMI. For more information, visit www.doverfr.com.