Our US Correspondent Charles Paikert sat down this week with Bill Crager (pictured) and Bob Oros to discuss their entry into private markets, its suitability for RIAs and their clients, why they believe private investments will become a staple for RIAs and the controversy and criticism that has accompanied this asset class.

It would be hard to find a bigger investing story than the massive push to expand private market assets, which now total over $27 trillion in the US, to the registered investment advisor (RIA) retail marketplace. It shouldn’t come as a surprise then that two of the RIA industry’s most prominent executives in recent memory are now fully immersed in the private market space, Charles Paikert highlights.

Bill Crager was the co-founder and former CEO of Envestnet, one of the largest providers of turnkey asset managers programs and fintech software to RIAs. Crager is currently a founding partner at iAltA Holdings, which provides software infrastructure for private market data, and just launched Field, an AI wealthtech company.

Bob Oros was chairman and CEO of Hightower Advisors, one of the country’s largest RIAs for the past seven years. Before that, Oros was a senior executive at Fidelity, LPL Financial and Charles Schwab. He is now vice chair at PPB Capital Partners, a firm that sells alternative funds, investment products and operational support to advisory firms.

Family Wealth Report sat down with Crager and Oros to discuss their entry into private markets, its suitability for RIAs and their clients, why they believe private investments will become a staple for RIAs and the controversy and criticism that has accompanied this asset class.

Family Wealth Report: Why did you decide to enter the private market space?

Bill Crager: The asset class and the product innovation in the asset class has far outgrown the infrastructure. From where I come from, back in my days at Envestnet, we built foundational infrastructure for the industry, and what followed was the rise of a managed account environment for the independent advice space.

Our market is missing that kind of infrastructure that creates a real scale and integrated scale for the independent advisory space and that always interests me. To me, that’s opportunity.

Bob Oros: For me, running one of the largest RIAs in the US, I saw an increasing demand from advisors and their clients for more opportunities to invest in the private markets.

And as I think we all know, something like 90 per cent of the companies in America are private. Companies are increasingly staying private as long as they possibly can, as opposed to entering the public markets. And so we saw this increasing demand, but yet, to Bill’s point, a lack of the sort of structure that creates the efficiency needed to be able to manage this well.

At Hightower, we made a number of moves to bolster our abilities there. Now we’re entering the next phase, where it’s beyond just access to alternatives and private market opportunities. Advisors are starting to focus more on how they can create differentiation and be able to offer unique opportunities to their clients.

This is the next opportunity for advisory firms to really show some ability to differentiate.

FWR: Private markets have become very popular. What do you think was missing, particularly in the RIA ecosystem? How are your respective companies addressing that need, and how has your own RIA experience informed your new role?

BC: Just by definition alternative investments were considered peculiar. Now we’re bringing that to the mainstream, so there’s lots of work that has to go on behind the scenes, not only infrastructure, not only operating and administrative support, but also education, and presentation, and ultimately reporting.

The bigger question is, what’s the appropriateness of a particular solution, a private market solution, in an individual’s portfolio? And today, that process is very wholesaled. And it is leaving all the burden to the advisor to understand their clients and then place that asset and then administrate it.

To me, that distance has to close. If a solution is sitting in a platform capability, it has to understand the job it can do in the underlying portfolio, create that narrative, and then have the workflow to go execute it so it becomes part of that client’s financial investment portfolio. That can be achieved today with modern technology.

BO: From like an advisor’s perspective, I think so much of the investment side of the business has become highly commoditized. Asset selection, asset allocation, it’s just really hard to differentiate there. I think private markets is the next opportunity for advisory firms to really show some ability to differentiate and create very bespoke solutions.

Especially for the high net worth, ultra-high net worth client, so many of them generated their wealth through either real estate investments or single asset bets, namely their own companies.

They’re increasingly looking for exposure to the types of things that generated their wealth in the first place. So simply buying a very liquid alternative investment no longer is really satisfactory for them. I think that combination is certainly helping to fuel the increasing demand we’re seeing.

What exactly does your company do?
FWR: You’re sitting next to somebody on a plane and you’ve gotten into a conversation. The plane is about to land, and before you part ways, they ask “So what exactly does your company do?”

BO: We provide the ability for an individual investor to get access to managers who invest in the private markets that typically are only supporting large institutions. And we do that through creating the legal structures that allow them to have that same ability that some of the largest pensions, endowments, and foundations would have.

BC: We’re closing the distance between that solution and the individual portfolio that that advisor is managing, so that they can connect in the most appropriate, most personalized kind of educationally supported way so that a private investment isn’t an alternative. It becomes a very well understood capability that fits in a financial plan and the job it’s doing within that financial plan.

It’s not different than the emergence of managed accounts

FWR: I’d like to focus on private markets as providing alternative investments for non-qualified retail investors, either mass affluent or high net worth, which is where a lot of the momentum is going. 

As executives who have worked for decades with RIA advisors, what should financial advisors be telling their clients?

BO: They should be explaining and talking about [private markets] in the same way that they would talk about any investment for the client, which is around risk, appropriateness, and need for liquidity. Because these investments, in most cases, are not highly liquid, you need to use them with the right types of clients who have a profile that both understands it and can sustain longer periods with no liquidity.

I think it’s very much an extension of the conversations they have today. [Alternatives] are also not something that necessarily everybody should be investing into.

BC: It’s not different from the managed account emergence back in the early 2000s. Institutional asset managers were delivering a capability that was not accessible to the retail investor in the past, and now it was coming to market, it was more available to more people and more portfolios. That’s the private market story.

Beneath that investment strategies, appropriateness, liquidity and risk all need to be understood. It’s just part of the narrative, and advisors should be introducing it the same way that things have been introduced to investors as they become more and more available to the retail investor over time.

Private markets should not be a walled-off arena for just a certain class of investors
FWR: What do you think are the major advantages of alternative investment for investments for retail investors?

BC: Most companies and different types of investment solutions are occurring in a private marketplace. So as the former CEO of a public company, we transitioned that company to become private.

Why? There are benefits to it. The value that’s being created in that business is substantial. And why should just the very few be able to have access to that ingenuity and innovation? It should not be a walled-off arena for just a certain class of investors.

To me, again, it’s access. Whether you’re looking at it from a private equity standpoint, a private credit standpoint or a fund standpoint, all of those represent opportunities that should be considered by more and more types of investors.

BO: I completely agree. I mean, the ability to invest into great companies at varying stages of their maturity, to Bill’s point, should not be something that limits individual investors. I almost don’t like the term retail, because I tend to think of that as further down market. I’m not one that thinks these things should be in 401K plans.

I think there are places, perhaps, these vehicles don’t need to go, but I think individuals who understand how these things work via their advisor should absolutely have the ability to invest behind them.

Private investments are often illiquid, opaque, highly leveraged and have high fees
FWR: Private markets have also been quite controversial. Critics point out that they can be, and often are, illiquid, opaque, highly leveraged, have high fees, and underperform public market index funds. Could you address these concerns, and how would you advise financial advisors themselves to address those concerns with their clients?

BC: I would say that the infrastructure is lagging the product and that there’s a need for more fundamental infrastructure to deliver these types of solutions. That creates an environment which has due diligence, which has an understanding of risk, which has transparency that is required in a more investor-based world that does not exist at scale or in an integrated way across that advisory practice today. That’s a missing piece, and that’s why I’m doing what I’m doing.

BO: Remember, this is not an either or. These private market investments are a portion of an overall allocation, and frankly, in most cases, are a very small piece of the allocated portfolio. So the opportunity to take on a little bit more risk with an opportunity to potentially generate significantly more reward, can be appropriate depending on what the advisor and the client’s appetite is for illiquidity over a period of time.

On average, we probably see the typical registered investment advisory firm may have an allocation of 5, 6 or 7 per cent to private market investments, and we think we’re going to see that grow, but it’s still going to be the minority of the portfolio. So I think it’s a piece of an overall strategy. And as long as the client and the advisor are aligned around the objectives behind it and the risks associated, I think it’s completely appropriate.

The risk is people investing into something they don’t really understand
FWR: Do you think that private credit and other alternative investments should be in 401(k)s and defined benefit plans?

BO: Well, I think those are two different animals, meaning a defined benefit plan being a pool, as opposed to a 401(k) plan, where you have individual participants, in most cases making investment decisions.

In my mind, it’s questionable whether [private investments] belong in the 401(k) arena. And if it does, I think it needs to come in conjunction with professional advisor support. Otherwise, I think the risk is you have people investing into something they don’t really understand.

BC: I’m in full agreement. What I’d add on the 401(k) side is duration, or longevity, because most people are beginning to invest in their 401(k)s in their 20s, 30s, 40s. That’s a long time horizon. Those long time horizons are how these public and private scenarios play out. But it requires that layer of due diligence and professional infrastructure to make sure that the appropriate decisions are being made.

We are in a formative stage of the industry
FWR: The Department of Labor has released its proposed rule on “Fiduciary Duties in Selecting Designated Investment Alternatives.” Morningstar just released their comment letter, citing concerns including litigation risk, insufficient guardrails and the quality of plans. Do you think they’re legitimate concerns?

BC: I would just comment that we are in a formative stage of the industry, and history repeats. So if you look back on the managed account industry [when] institutional asset managers were entering the market, the same questions were being asked around the fiduciary ability of investment professionals, credibility and regulatory concerns that surrounded [a new product]. 

What it tells you is that we’re very early stage, and that governance, technology, infrastructure, product are all beginning to form around an opportunity, which, if you go all the way back, is the fact that so many companies and so many different infrastructures are now private versus public.

This is not a tomorrow thing. It really is now.
FWR: How do you envision the evolution of the private marketplace over the next year to five years?

BO: Advisors are increasingly looking to allocate more, you’re going see more RIAs, more advisors starting to look for more sophisticated, unique offerings to get access and offer to their clients. So I think you’re going to see growth in the allocation and more interest in, being able to do something that’s unique to them, as opposed to just buying something off the shelf that’s me too, that may have additional layered fees that don’t need to be there.

We will work in combination with Bill and his firm and the work they are doing around infrastructure and technology. I think those two things together will propel this to much more efficient scale.

BC: Agreed. I think these are exciting months ahead. They’re critical, urgent months. You have this shift in focus within the private market space where the funds themselves are reaching for the retail wealth market. 

You have the advisory space itself saying, I want to allocate more into interesting things. You have a technology transformation from machine learning-based internet to artificial intelligently scaled and capable technology.

As you put those pieces together, I really see this transforming moment. And I think it’s now. It’s not like, you know, even in July. It is now. And, you know, it’s fun to be in the market to be able to build and help put these pieces together.

BO: I’ll put an exclamation point on what Bill said. It really is now. It’s not a tomorrow thing. The conversations we’re having every day around this shows just how exciting it is, which is probably why you found a couple of ex-wealth management RIA guys who have found their way into this.