Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:05] Speaker B: Welcome to Perspective First, a podcast series by A&M's financial services industry group where we speak with industry leaders about the latest trends and hot topics within the financial services sector.
I'm your host Gautam Ratnagar and today's episode is about alternative investments in retail focused on warehouses.
Joining me is my co host Will Sammons and our guest speaker, Mark Sutherland, head of alternatives at bank of America Merrill Lynch.
Mark, thank you for joining us today. Do you want to share a little bit about your background and your experience here?
[00:00:41] Speaker A: Yeah, of course. And thanks for having me. Gautam, as you mentioned, I lead alternative investments for bank of America's wealth management business.
So my team is ultimately responsible for the sourcing and supporting of a platform of hedge fund private markets and real assets for the wealth management business across Merrill and Bank of America's private bank.
And our core clients really range from accredited investors all the way through ultra high net worth individuals and institutions.
Great.
[00:01:11] Speaker B: Sounds fantastic. I mean we have all seen the growth of alternatives in the last few years. It is one of the fastest growing asset classes and we observed that it's going to be about 30 trillion by 2030, which is about double the size of where it is today.
So very timely, Mark, to talk about retail alternatives. As we have seen market dynamics result in a challenging fundraising environment for managers who have traditionally focused on institutional rising interest rate, namely being one of the players.
But also what we have seen is as retail investors preferences have changed and there's increased awareness and a focus on diversification, most managers are now focusing and prioritizing retail as a source of capital fundraising. About last year's fundraising, I think 60% of the fundraising was primarily with the six large alternative managers. So we continue to see this as a growth driver and ongoing trend in alternatives.
[00:02:10] Speaker C: More specific to that, one of the things that we've seen is that the penetration of alternative assets and retail channels is substantially lower than institutional channels, 13% relative to 87%.
However, within the retail channel, wirehouses have been one of the most successful groups in terms of incorporating alternative products into client portfolios with 34% uptake overall with the next highest channel standing at 28%. As managers increasingly focus on the registered investment advisor and independent broker dealer channels to help stimulate growth and raise funds. One of the things that we're seeing is there's typically three high level challenges that they're facing more broadly in terms of advisor education, access to home office for portfolio allocation or portfolio allocation decision makers, and then a broader distribution approach to the retail Channel Mark. When we think of the retail channel, we tend to think of it as three high level buckets around centralized, typically characterized by large broker dealers, independent channel, typically characterized by RIAs or independent broker dealers. And then the third channel being the direct to consumer channel. From your vantage point at a large bd, what are some of the key challenges that you're seeing or some of the key lessons learned that you have based on the success that you've had helping clients and advisors leverage alternative asset products?
[00:03:32] Speaker A: Yeah, thanks Will. I mean, it's a great question and it's something candidly that we ask ourselves here constantly. Challenges are articulated to us pretty clearly because we have the benefit from, from getting feedback of literally thousands of advisors and clients that are doing our business or not for that matter.
And we view these challenges as being valuable to provide us insights on where the opportunities ultimately lie. I'll start off with advisor education and this has long been a focus for the industry as much as it was for us as well. I think there's been a lot of progress made in this regard. Here at bank of America we leverage a combination of internal materials that are produced by our chief investment office and home office. And we also are beginning to leverage more and more some of the collateral and education that we're seeing from our manager sponsors, which has been a valuable extension. Education ranges from the most basic 101s on alternatives to, you know, fairly advanced strategy and product education that's also necessary for our advisors. I mean, at the end of the day, when you're thinking about offering alternatives through an advisor or intermediary, right. They need to really feel comfortable, believe in the product and also be able to turn around and articulate that in a confident way. So that's really why education is so important, particularly in this channel. There's a few things that we're focused on. When you think about education, I don't think there's a lot of need anymore for the why alternatives. I think there's a pretty broad acceptance that these are good for clients.
So really where we're shifting and we're seeing the most need is around implementation, right framework to talk about how you would build portfolios. To this end, we're also looking a lot at getting direct to client kind of how do we bring our platform and our sponsors closer to the end investor because we know how valuable that can be with that connectivity. So case in point, we rolled out an educational video series that's actually publicly available called let's Talk alts.
We take some of our Sponsors and thought leaders in the space. And we do short interviews kind of similar to we're doing today just on topics that we think clients may be interested in. We also just rolled out a piece called why Alts, why now? And it's a client facing piece of collateral that tells a very simple narrative from what has historically been a complicated one around why alternatives make sense in a portfolio construction context.
And then the last piece I'd mentioned on the education front is really around events. I think there's no substitute for in person engagement. So we've really leaned into finding ways to bring our advisors to our sponsors and host educational symposiums that have really furthered their education and have been embraced.
The other point I think was number two that you mentioned will was access to home office for portfolio allocation here. I think this is probably one of the reasons why you see the broker dealers have an edge off of some of the other intermediaries. This is something that we, we really lean into and have for a long time. So today we leverage what we call our chief investment office and they provide our recommended portfolio allocations to all investors. Every advisor thinks about the CIO and how to start when they talk to clients.
Alternatives now, you know, being far more accessible than they were five, 10 years ago are a major component of that. And we believe they're going to play a role for nearly every client.
And for most of our clients, our recommended weighting is in excess of 25%.
So meaningful. I think if you look ahead on that topic of home office and portfolio allocation, I think the next frontier that we'll be talking about is integration into some of these model deliveries which we're already starting to see, you know, a lot of media coverage at. But I think the industry still has a little way to go before that becomes a bit more tangible. The last thing I would call out when we talk about challenges is something I would bucket as what we call experiential headwinds. The product evolution that we've seen has addressed a lot of this. But there are still components of alternatives that when it comes to things like transactions and reporting, it feels a bit off market to investors when you compare for traditional investments. So that that also remains an area of focus for us.
[00:07:48] Speaker C: It's interesting you mentioned that Mark. I think one of the things that we hear from our clients is definitely that as they continue to expand into the more independent space in retail, one of the common challenges that they have to face both in terms of advisor and investor education is liquidity or the perception of liquidity it's interesting you mentioned the model portfolios. I think that definitely factors into that as well. Do you have any thoughts or lessons learned from your experience on adoption you think might be valuable to think about in the independent channel and the continued democratization of these products?
[00:08:21] Speaker A: Yeah, well, I think liquidity is always going to be more of a focal point for the individual investor. Because if you look at the playbook for the institutional allocators who have, who have been in the ALTS domain, they simply account for a perpetual timeline in most cases. Right. So liquidity is almost a non factor for our investors at the portfolio level. Liquidity tolerance is certainly a consideration much the way risk tolerance or tax sensitivity would be. But illiquidity is different from the earlier headwinds we touched on in that. I don't think it's really something that we think about solving for. I think it's simply something that needs to be educated on expectations, need to be measured toward and it just has to be a factor you consider when investing in private markets. The expansion of the evergreen or the perpetual, sometimes called semi liquids in the private market space has introduced some value terms, including some liquidity features which can be valuable for rebalancing. But at the end of the day, these are still, you know, largely private investments and they're going to have limited liquidity.
So we really position them and have our advisors position them as illiquid.
[00:09:30] Speaker C: So from your perspective, Mark, a lot of the education in particular for, you know, advisors and investors is really about time horizon and how time horizon layering fits into portfolio construction and then supports the appropriate choice of product for the end investor.
[00:09:46] Speaker A: Absolutely. I think. Well said.
[00:09:48] Speaker C: No, and I agree with you. I think a lot of the innovation that we're seeing in the structure space and in the product space definitely enables the broader democratization as well.
[00:09:58] Speaker B: That's a good segue. I think as we have seen alternatives and the evolution, I think in the recent past years we have seen more of purpose built, wealth focused products being developed, like more evergreen structures, interval funds, non trader bdcs that address some of these initial liquidity challenges that were there in the channel as well as some other fee and regulatory concerns around it.
As we see the evolution and the ongoing changes, as Mark, you just indicated, some of the model portfolio developments, etc. That we are hearing in the news, what do you see will perhaps become more dominant in alternatives in retail, especially perhaps in the White House channel? And what do you see as the structural innovations that will further drive democratization of alternatives?
[00:10:48] Speaker A: Yeah, So I mean you, you hit the big ones. Gotham and the, the interval funds, the BDCs, the non traded REITs, the, the 40 ACT tender offer funds. You know, we kind of collectively think of those as some subset of registered offerings. No matter how you cut it. I mean they've made a major impact on hedge strategies and they were kind of first leveraged in some of the multi manager offerings we had on the platform.
And then if you look now how we're seeing those structures for delivery of what we call evergreen private markets, you know, we believe that those are not at all a trend. Those are, those are here to stay and here to stay for the benefit of our investors at the end of the day. I mean, I think there are a lot of attributes of those products that have allowed them to resonate and we see that simply through the demand of where our clients are putting their money.
Built in diversification, right. We know the discipline that's required to build a multi year traditional drawdown private equity or private markets portfolio. When you can solve for diversification both on a forward and backward looking vintage with a single ticket and immediate delivery, that's valuable. You know, other things that I think have really resonated is for an advisor to have what we call a shelf product. A product that is going to have a consistent experience and is going to be something they can get familiarity with and offer for a longer period of time to a broader group of investors. In many cases that in and of itself is valuable in terms of simplifying their practice.
And then there's terms, right? Lower investment minimums. To Your point, the 1099 or simplified K1s, those resonate as well. So we view this as a positive trend in the industry. Again, something we think is here to stay. We do not view it as a replacement for the traditional GPLP vehicles or traditional drawdown private markets. We think that those will continue to play a role and we're actually putting together some thought leadership to help our advisors navigate that question. Going back to the point on education.
[00:12:53] Speaker C: It'S interesting that you mentioned that, Mark. I think one of the things that we're definitely seeing, I know you mentioned hedge funds. The number of hedge fund launches hit an all time low last year over a 10 year period. While the number of new product launches in the private market space, again, the interfool funds in particular, there were 91 I believe in the market at the end of 2023 and there are 80 launched last year alone in 2024, bringing the number to 171.
If you include tender offer funds. I think it's 256 total within the US and one of the particular hot areas that we see is private debt. As traditional managers continue to diversify their offerings, typically the combination of public and private debt is the first place that they start.
In the last two years, we've seen 26 traditional managers acquire private credit capabilities outright. And obviously there's a number of partnerships in the market as well.
When we think about the number of choices that are available to the end investor in the market across all the different alternative asset classes, what do you look for and what can managers do or what do they need to consider to gain access to the wirehouse platforms?
[00:14:01] Speaker A: Yeah, I mean, I'll start by saying the product expansion, we feel it every day. It's pretty staggering. And we view this expansion of products to be a good thing. You won't see us expanding our platform offerings at the same pace that the industry is expanding. Kind of the effect that that's playing out is it allows us to continuously raise the bar as a distributor in what's already a highly competitive space. So we think that's good for the end investor in terms of what we look for. Right. Because we spend a lot of time canvassing the market and meeting sponsors and we have a relatively, you know, tight filter in terms of how many new products we will add. It's really because we're looking for a specific type of partner. Right. And I think the core things that we look for are relatively intuitive. We want great investment managers that have a sustainable edge in whatever space they are offering product. Right. We also think it's important to have a long term commitment and partnership to private wealth and specifically our channel. Right. These are going to be long term partners of our investors. So they need to make sure that those expectations are aligned up front. And at the end of the day, a focus on investor servicing. Right. I think the sales cycle and being able to raise assets is one piece, but the ongoing engagement with us and our clients and advisors is just as important, if not more important.
So you know, as an industry, we spend a lot of time projecting what the future will look like and what structures and strategies are going to drive the next wave for alt investing. I think it's difficult to predict exactly how that will play out as we've seen.
But what we do know is that, you know, our investor preferences for access to great investment ideas, investor friendly terms, and again, that component of investor servicing, that's not going away. So those are the things that we really try to make our North Star.
[00:15:58] Speaker B: That's great. Thanks for sharing these perspectives, Mark. I think as we look at where retail alternatives is, it's, it's really an exciting time to be in the space. We see fundamental structural changes with the ecosystem under play with both products, the fintechs, the platforms and the operational capabilities and innovations are going to continue to further increase the access to the retail segment. I think warehouses will continue to be a strategically important channel for most managers.
And thanks for sharing your thoughts. I think those are all great points for folks on both sides of the industry to consider.
Any final thoughts from your end?
[00:16:39] Speaker A: I mean, I agree with everything you just said. There has never been more interest, in my view, from private wealth for alternative strategies than there is now. And at the same time we're seeing really meaningful and thoughtful investments in resources and education from those asset manager partners. So I think as long as the end investor remains everyone's top priority, we are about to enter a really great period of growth.
[00:17:07] Speaker B: Thank you Mark for joining us and sharing your perspectives and thoughts.
And thank you to the audience for listening to this podcast. We will be back with another segment around this.
