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 today to be joined by Matt Brown. Founder and CEO of CAIS. Welcome, Matt.
Matt:
Thank you so much. It's great to be here.
Tony:
So Matt, for those who may not be familiar, give us a little bit of a background on CAIS and what was your motivation for founding the organization and the role that you play in the overall alternative ecosystem today?
Matt:
Well, first of all, this is actually a, quite an exciting moment in time here to be sitting in between wealth management, asset management, and the rise of technology. In 2009, the vision of the business, which still remains today, is and was, to level the playing field between financial advisors and the independent channel versus the wirehouse advisors.
And when I say level the playing field, many of the wirehouse advisors had access to third party alternative investment funds and products because they had built platforms. But in the independent channel, the RIA channel predominantly, there was no one platform or no one firm built a platform. So, our idea was, could we step in with one technology that really allowed an advisor to have ease of access, end-to-end solution, and education to alternative investments?
Tony:
It's exciting. We've watched the industry evolve quite a bit over the last decade or so. We're here today, and you're introducing CAIS Live, which, thank you for having me. I love speaking to the audience who were very engaged. What was the motivation behind CAIS Live?
Matt:
Let me take just a half step back, because the CAIS Live story really is the continuation of the CAIS story.
So, when we looked at bringing alternatives and making them more accessible to the advisor community, really we were taking on an adventure to solve a series of problems. It just wasn't as easy for a financial advisor to get access to an institutional asset manager as say, it would be for a family office or an institution.
There's a lot of different and unique issues that had to be solved. First, we wanted to make sure that there was enough information out there. So, really the due diligence on these fund, so advisors felt comfortable that they're being rated and that's why we have our partnership with Mercer. Really the second area was making sure that the actual transaction workflow wasn't too burdensome.
Unlike a big foundation or endowment that might fill out one subscription document for a hundred million dollars to a big fund, we're dealing with financial advisors who have lots of smaller clients and doing smaller tickets. So, we didn't want them to drown in the volume of transaction, so we built really a pre trade, a trade, and a post trade experience that allowed very turnkey access to alts.
But to answer your question, where are we today and why CAIS Live? All the technology that we bring, and we believe we have the most modern stack available, to make advisors lives easier. The reality is financial advisors and asset managers truly value engagement. They want to build human trust, understand their points of view.
So we're committed now to that last mile fix really, which is we want to bring education and connectivity engagement to the advisors in their hometowns across America. So, we're coupling modern technology with human engagement. And we think that's the winning formula to really allow advisors to scale alternative investments in their client portfolios.
Tony:
Fantastic. I want to go back to earlier this year, you released your survey. You've been doing an annual survey for the last couple of years focused on advisor adoption. And I look forward to reading it because I think we all feel that there's a sea change going on and advisors seem to have a much greater appreciation of the value of alternatives.
Maybe if you could give the high tips of what that survey found this year and how it might compare to last year's survey.
Matt:
So the survey is done with our strategic partner, Mercer. The relationship between CAIS and Mercer since 2009, day one, is really the separation of our platform with the ongoing due diligence of the funds on the platform.
So Mercer does all the operational and investment due diligence, and then the ongoing monitoring independently from the CAIS platform, really giving that advisor community that confidence that there's a separation there. Mercer also has deep resources and is a global firm and they see trends in many different ways. So we conducted a survey with the advisor community with Mercer, and we're asking a very straightforward question, which is barriers to alts adoption. What are your levels of alts within your client portfolios? Do you plan to increase alts in the coming year or beyond? And what we found was really quite astonishing, which is that most advisors were not making alternative investments, a core holding.
We talk about the 60/40 portfolio, and average allocation from advisors to alternative investments still hover around that 1-3% range on average. You have very sophisticated advisors who make that a core, but on average, so that was really one of the big findings.
But really the question that we got most encouraged about was the fact that almost 90% of advisors plan to increase their allocation to alts in the coming years. So, I think the message is getting through that if you want to improve client portfolio performance, if you want to attract more sophisticated clients, if you want to merge with firms who have alts practices, alts are becoming, well, let's just say more traditional.
Tony:
And it's interesting, I think your data is consistent with data from Cerulli and others who have done surveys in the space. What's interesting is I think sometimes advisors self-report a higher allocation than what we see in the industry. So I think the industry has roughly been 5-6% for the last decade.
Institutions, endowments and foundations might be 70 to 80, pension plans might be 50. The UBS Global Family Office Report shows 43% allocation across family offices, but yet we're at that 5% number. We all know that 10, 20, even 30 percent actually provides better client outcomes. In the report, there are some challenges.
What are the challenges and how can we collectively as an industry help solve for some of those challenges?
Matt:
Well, financial advisors, as a former financial advisor, we would always frankly shy away from topics that we weren't fluent in. We're oftentimes expected to know everything and alts is often an area that is lesser known.
So, it's not a mystery novel that you're going to find financial advisors possibly that don't have the fluency in alts with their clients talking about them. So I think that first big challenge to change the alts allocation is really leaning on the front foot and looking at education as a primary driver for adoption.
If we can get financial advisors up to speed on understanding the strategies of alternative investments, how to implement those in a broader client portfolio, and speaking fluently with their clients about alts, you're going to start to see those numbers change a lot more like the institutional investors that you just referenced.
I will say, however, the data does suggest that if wealth management today as an industry is north of 40 trillion dollars, meaning the amount of capital that financial advisors oversee, it will be closer to say 70 to 80 trillion in the next decade. That will mean that close to 10 trillion dollars of new capital will come into alternative investments as adoption rates increase.
And that's an industry number that's on a CAIS number. So we all have a lot of responsibility right now to make sure we get this right. Both the financial advisors, the asset managers, which is an area that I think we should talk about, and also platforms like CAIS.
Tony:
And Matt, you're talking our language.
That's in fact, the motivation for the alternative allocations podcast is really to help advisors with the language, the positioning, how to have better engagement with their clients about it, and then ultimately share some of the trends that we see across the industry. If I want to go back to the report, because one of the things that I think we've seen consistently over the last couple of years is this whole notion of illiquidity is something that advisors balk at, and I think it's partly because we have conditioned individual investors to think they need to be liquid. They need to be able to be in today and out tomorrow. But in fact, investing in private markets is a completely different thing where we want to instill a long-term discipline. And as my dear friend John Bowman often says, illiquidity is just a feature. It's not inherently good or bad. It's just a feature.
How do you think about illiquidity and how do we, again, better engage advisors around leaning into illiquidity rather than being fearful of it?
Matt:
It's a huge point. It's a great question. Many of us own our homes, so the number one illiquid asset that most of us have are our property. And for some reason that doesn't get talked about, but that is a piece of our net worth that is illiquid.
Over the years, we've seen many asset managers tackle the liquidity problem in a variety of ways. Sometimes it's creating structures and wrappers of strategies that provide liquidity. I think that is a double-edged sword. And then you have other asset management firms and advisors who are educating their clients on why illiquidity is, in fact, a fundamental part of a portfolio if you want the illiquidity premium and the benefits of illiquidity.
I do think that some of the efforts that are being made today to create wrappers or fund structures that provide semi liquid opportunity are good, and I think that's helping. But at the end of the day, we should be equally educating the financial advisors and their end clients why it's okay to have a portion of your portfolio that is illiquid.
What we don't want to be in a situation where there's an illiquidity mismatch, where the perception of liquidity is actually greater than the reality of liquidity. And so as we think about funds that come onto our platform, as Mercer thinks about the funds that they're due diligencing that come onto our platform, we are looking very closely at the liquidity terms, especially in the private market arena.
Tony:
Yeah. And it's interesting. There's a couple of things in there that I want to pick up on. One is the fact that the traditional drawdown structure certainly has benefits as well. And the preponderance of the assets are still in a drawdown structure. It's just the newer structures, registered funds, call them interval and tender offer funds, do offer illiquidity features.
And I always like to caution advisors not to think of them as being liquid, even though you've got that safety valve, the ability to get money out if you need them – if the client circumstances changes over time. I always remind advisors, if the reason you're investing in private equity is you want to capture that long-term illiquidity premium, you're not going to capture that if you're in today and out tomorrow.
So I still look at those as being long-term investments, but it's nice to have that safety valve should your circumstances change over time.
Matt:
And I would just think the responsibility of explaining clearly the safety valve features, always finishing the sentence, this tender offer fund or this interval fund has liquidity. That's not the full sentence. I think the full sentence is under certain circumstances, quarterly at a certain level. So making sure that there's real transparency and expectation management is very important on those structures.
Tony:
I think it's so important. And again, it's managing expectations with clients. And if we can, again, condition them around the expectation that these are long-term investments, that's a good thing for everyone. It instills that discipline that we really want to have with individual investors. Institutions have that discipline.
Matt, I wanted to pick up a little bit on your experience and my experience, both spending time working with family offices and institutions, and now all of a sudden, these lessons are being brought to the private wealth community. What are some of the lessons that maybe we should spend more time focusing on as the private wealth community starts to allocate to these new investments?
Matt:
Well, the family office community, the institutional community is just such a different channel of capital with different expectations. For example, you mentioned the drawdown structures in private equity as a platform. Fortunately, we're able to see flows in all different structures and strategies. We're a neutral platform in the marketplace. I think the drawdown structure makes a lot of sense for the family office and institutional community. But with the preponderance of newer structures coming into the market and the challenges that we have to think through them, advisors are gravitating to the open-ended versions, the fully funded versions of private equity or less liquid assets.
Oftentimes at the expense possibly of a little return because the ease of use and the scalability of that product to be able to be a core holding in a portfolio allows it to be there. So, we see that if we look at three, five years ago, where a drawdown structure would have a way forward in the wealth channel. That's narrowing right now as BDCs, REITs, interval funds that have accredited level investing or mass affluent are really taking over. And I think that as asset managers get more comfortable with those structures and how to bring their strategies into those wrappers, that will be probably the way forward for most of the alts investing going forward for the mainstream of the advisor community.
Tony:
And that's probably a perfect segue. You have a unique vantage point sitting in the center of this alternative ecosystem. What things are you seeing, whether it be new products coming to the market, advisor adoption, and they're asking questions of you to provide education. One of the things that came up today is advisors were saying, where can I get more and better information, which is our sole focus, but yours as well.
What are you seeing as the industry has evolved from a small focus on alternatives to a larger and larger focus over the last couple of years?
Matt:
It really has three players here that we have to think through. One, we have the demand on the advisor side, the demand for better portfolio returns to meet client needs, and that's growing.
You also have the asset manager demand for the advisor. Which hasn't always been there. I can remember the days of CAIS where we were convincing asset managers that the wealth channel was actually something they should be focusing on. That clearly is over now because every asset manager now wants to be in the wealth channel. But those two communities are now meeting each other.
And then what's really giving it an acceleration is of course, technology is delivering on the promise to make it easier, faster, and less expensive. So when you have the confluence of these three events, you're seeing a rapid adoption of alts across the board because the asset managers are meeting the advisor on where they need to be.
Then the delivery of education, a more modern approach to thinking through portfolios. So it really is a new moment in time here, as I mentioned earlier, where we haven't seen anything like this in the alts meets wealth world. Period. So, I believe, and I think you believe as well, that in the next three to five years, we're not going to be thinking about alternative investments as that outlier investment.
They're going to be more traditional in a way and be baked into most every portfolio. That's clearly being seen now as technology allows it to be put into TAMP portfolios where they can be rebalanced. So. There really is a bit of an evolution going on here.
Tony:
Yeah. Music to our ears. I agree with you. I think we'll hopefully get past this term “alternative” and we start to think of these as core investments that have different roles in individual client portfolios.
Matt, I'm going to put you on the spot and if you had a crystal ball and you tease a little bit about the next three to five years, if today we're sitting here and we're looking at a 5% allocation across the industry and we're starting to see a real sea change where advisors are paying a lot more attention to this. Where do you think we are five years from now and ten years from now from an allocation perspective, from managers bringing new products and understanding the value of the wealth channel, and ultimately what does this do for individual clients?
Matt:
If you just look at the growth that's happening today, and you just were to extend that five, ten years out, you're going to see average portfolios in the 10-15% alts. The newer products make it easier. They reach the entire business. Private equity is in a black box, extremely transparent. We haven't talked about hedge fund strategies, but they still exist. And there's a role for them too. So, we're going to see, and that firms like Franklin Templeton really investing in education, creating a great university for advisors. That's being replicated across the board by many other firms. So the push at every level to increase the allocation for the right reason, which is to improve end client performance, is going to drive allocation rates very much into the double digits.
Many advisors are already there, but it's just a question of the large middle population of advisors that have yet to adopt. And that's where the biggest transformation is going to happen.
Tony:
Matt Brown, thank you so much for joining me here today. Again, I think there's a lot of shared vision of where the industry is going. This confluence of events where a market environment is demanding a more robust playbook, product innovation, making these products more accessible to a broader group of advisors. But as you pointed out, none of this works unless you have access to world class managers. And we're starting to see more and more products coming to the market from reputable managers.
I'm very bullish on alternative investments. Thank you for spending time on the Alternative Allocations podcast series. And I look forward to seeing where we are five years from now, I suspect a very rosy future.
Matt:
Thank you so much. And Franklin Templeton's a great partner. And we look forward to a lot more together.
Tony:
Thanks, Matt.
Matt:
Thanks.
Show V/O:
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