A survey of US RIAs by PPB Capital Partners has found that while firms are encouraged to provide customised alternative investment solutions for high net-worth clients, such funds prove unwieldy and expensive to operate.
Among respondents, 62 per cent described operating private illiquid funds in their wealth management practice as moderately difficult, while 33 per cent described the funds as highly challenging to administer. Five per cent reported alternative assets easy to manage.
Respondents pointed to several operational areas that presented challenges including paperwork processing, reporting, compliance and complex tax issues. Others identified the time required to complete diligence and offering, pitch it and explain it to clients as “painful”.
When asked to select “all that apply”, 52 per cent of respondents identified underlying investment valuations as the most frustrating area. Compliance ranked a close second with 50 per cent of respondents citing it as the top area of difficulty, followed by tax reporting/k1s at 48 per cent and subscription/redemption paperwork at 40 per cent.
“Our survey reveals that RIAs are hamstrung with the level of difficulty administrating and operating alternative funds as opposed to spending time with clients,” says PPB Capital Partner’s EVP and COO Adam Stern (pictured). “We know from our previous survey that RIAs are allocating more to alternative investments and now we understand where the operational pain points exist.”
When asked whether clients questioned fees for managing a private internal fund, RIAs said that “double-dipping” was a chief concern. Among the respondents, 35 per cent noted that clients were sensitive to any appearance of charging two fees for investing in an alternative fund. Twenty-nine per cent of respondents were concerned with fund operating expenses. Research and diligence fees and audit and tax fees accounted for 7 per cent and 5 per cent of responses respectively. Slightly more than 24 per cent of respondents selected “all of the above”.
Approximately 34 per cent of RIAs identified feeder funds as their preferred vehicle for offering clients access to alternative investments, followed closely by customised fund of funds at 29 per cent. RIAs cited the ability to customise an investment vehicle for clients with respect to fees, terms and minimum/maximum investment levels, as an attractive feature. Private interval funds and public interval funds ranked third and fourth at 20 per cent and 17 per cent respectively.